As filed with the Securities and Exchange Commission on August 13, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MotherNature.com, Inc.
(Exact name of registrant as specified in its charter)
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Delaware 5499 23-2832064
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification Number)
of incorporation or ----------------
organization) MotherNature.com, Inc.
One Concord Farms
490 Virginia Road
Concord, Massachusetts 01742
(978) 929-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Michael I. Barach, President and Chief Executive Officer
MotherNature.com, Inc.
One Concord Farms
490 Virginia Road
Concord, Massachusetts 01742
(978) 929-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Howard S. Rosenblum, Esq. David T. Brewster, Esq.
Testa, Hurwitz & Thibeault, LLP Skadden, Arps, Slate, Meagher & Flom
125 High Street LLP
Boston, Massachusetts 02110 One Beacon Street
(617) 248-7000 Boston, Massachusetts 02108
---------------- (617) 573-4800
Approximate date of commencement of proposed sale to public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Title of each class of Proposed maximum aggregate Amount of registration
securities to be registered offering price (1) fee(2)
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Common Stock, $.01 par
value...................... $57,500,000 $15,985
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes shares of common stock which the underwriters have the option
to purchase from MotherNature.com to cover over-allotments, if any.
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 13, 1999
Shares
[MOTHERNATURE.COM, INC. LOGO]
MotherNature.com, Inc.
Common Stock
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This is an initial public offering of shares of common stock of
MotherNature.com, Inc. MotherNature.com is selling all of the shares of common
stock offered under this prospectus. We anticipate that the initial public
offering price will be between $ and $ per share.
There is currently no public market for the shares. We have applied to have our
common stock approved for listing on the Nasdaq National Market under the
symbol "MTHR."
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 5 to read about risks you should consider carefully
before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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Per
Share Total
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Public offering price............................................... $ $
Underwriting discounts and commissions.............................. $ $
Proceeds, before expenses, to us.................................... $ $
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We have granted the underwriters a 30-day option to purchase up to an
additional shares of common stock from us at the initial public offering
price less the underwriting discount. The underwriters expect to deliver the
shares on , 1999.
-----------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Wit Capital Corporation
The date of this prospectus is , 1999
[Photograph of a family in front of a computer with the MotherNature.com home
page on the screen.]
[Photograph of a middle-aged person viewing the product page for a popular
arthritis remedy.]
[Photograph of several MotherNature.com products in a home setting.]
[Photographs of our target customers actively participating in sports or other
outdoor activities.]
[Photograph of a customer opening a MotherNature.com mailing carton.]
[Photographs of miscellaneous pages on the MotherNature.com Web site.]
PROSPECTUS SUMMARY
This summary highlights certain information found in greater detail elsewhere
in this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors," before you decide to buy our common stock.
MotherNature.com, Inc.
Our Business
We are a leading online retail store and information source for natural and
healthy living products. We offer approximately 13,000 vitamins, supplements
and minerals, or VSM, and other natural and healthy living products on our
site. We also provide educational and authoritative information on VSM and
other natural and healthy living products from recognized sources in an easily
accessible manner that allows our customers to make informed product
selections. Through our innovative combination of content and commerce and an
aggressive mass media advertising program, we intend to establish
MotherNature.com as the destination of choice and trusted advisor for consumers
interested in VSM and other natural and healthy living products.
Since we launched our redesigned Web site in late 1998, our revenues have
grown from $105,000 in the fourth quarter of 1998, to $251,000 in the first
quarter of 1999, to $704,000 in the second quarter of 1999. As of July 31,
1999, there were approximately 77,000 registered members in the
MotherNature.com community.
The key components of our site include the following:
Educational and Authoritative Information. We provide consumers with access
to over 1,300 articles, news clips and encyclopedia entries from the
Encyclopedia of Natural Health, as well as narratives from prominent sources
and journals, on a variety of natural and healthy living topics, such as health
concerns, natural remedies and recent studies. The Encyclopedia of Natural
Health incorporates information gathered from over 500 authoritative scientific
and medical journals. We also have established a Medical Advisory Board whose
members contribute content and guide our editorial staff in developing and
reviewing content.
Integration of Content and Commerce. We integrate our content with our
products in a manner that allows our customers to make informed product
selections. Consumers can search our site for specific products and easily
access relevant information on those products, or they can research specific
health concerns, lifestyles or special interests and find complementary
products or our "solution baskets" to address particular health concerns.
Convenient and Private Shopping. Consumers can browse or shop on our site 24
hours a day, seven days a week in the privacy of their homes or offices. At
MotherNature.com, consumers can research and purchase products for personal
health concerns without facing retail store personnel. Consumers also can use
our personal shopper service or reorder previous selections with one click.
Broad, Expandable Product Assortment. Our product selection is substantially
larger than that offered by store-based retailers. We offer approximately
13,000 VSM and other natural and healthy living products, or SKUs, on our site,
and we can special order additional products through our supplier
relationships. Our online store is easily expandable to include additional
natural and healthy living products and related services.
Customer Information and Ongoing Communication. We use e-mail to provide
order status and shipping confirmation and to keep our members aware of
selected healthy living news relating to their past purchases. Because we
obtain demographic information on our members through the registration process,
we are able to refine our site and customize our product offerings.
1
Our Market Opportunity
The VSM market is projected to grow as the "baby boomer" population becomes
increasingly concerned with aging and disease, preventative health care and
natural products. Sales of VSM totaled approximately $8.9 billion in 1998 and
are forecasted to grow at a compound annual rate of 13.3% to $16.6 billion in
2003, according to Packaged Facts, a consumer products market research firm. As
research studies have indicated the health benefits of VSM, the percentage of
U.S. adults who take vitamins has increased from 43% in 1993 to 56% in 1998,
according to Packaged Facts. We believe there is also a large market
opportunity for us in other natural product categories beyond VSM, including
personal care products, household products, non-perishable foods, organic
coffees and teas, sports nutrition, cosmetics, baby care products and pet care
products.
Our Strategy
The key elements of our growth strategy are as follows:
. promote the memorable MotherNature.com brand name through an aggressive
advertising campaign, including a national television campaign expected
to commence in the Fall of 1999;
. establish MotherNature.com as the trusted authority for VSM and other
natural and healthy living products through our marketing efforts and
our informative and authoritative site content;
. capitalize on the inherent need to replenish VSM products by promoting
repeat and complementary product purchases;
. enlist and provide financial incentives for other businesses in the
healthy living industry, such as health care providers and health clubs,
to refer their customers to our site;
. provide quality customer service and rapid product delivery through our
in-house fulfillment facility, which we are expanding in order to
increase inventory levels of popular products; and
. expand our international presence in order to establish MotherNature.com
as a global brand.
Our Offices
Our executive offices are located at One Concord Farms, 490 Virginia Road,
Concord, Massachusetts 01742, and our telephone number is (978) 929-2000. Our
Web site address is www.MotherNature.com. The information on our Web site is
not incorporated by reference into this prospectus and should not be considered
as part of this prospectus.
2
The Offering
Common stock offered.......................... shares
Common stock outstanding after this offering.. shares
Use of proceeds............................... We intend to use the net
proceeds of this offering for
advertising and marketing
expenditures, to fund operating
losses and for general
corporate purposes, including
expanding our product and
service offerings, enhancing
our infrastructure and working
capital. We may also use a
portion of the proceeds to
expand our business through
strategic alliances and
acquisitions.
Proposed Nasdaq National Market symbol........ MTHR
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The number of shares of common stock outstanding after this offering is based
on shares of our common stock outstanding as of June 30, 1999. This
calculation:
. includes 66,201,914 shares of common stock to be issued upon the
conversion of all of our convertible preferred stock outstanding as of
June 30, 1999;
. excludes 7,628,247 shares of common stock issuable upon exercise of all
options outstanding under our 1998 Stock Plan as of June 30, 1999 with a
weighted average exercise price of $0.35 per share (819,850 of which
were exercisable on June 30, 1999); and
. excludes 1,207,317 shares of common stock issuable upon exercise of all
of our warrants outstanding as of June 30, 1999.
Conventions Which Apply to this Prospectus
Unless we indicate otherwise, all information in this prospectus reflects the
following:
. no exercise by the underwriters of their over-allotment option to
purchase up to additional shares of common stock;
. the conversion of all of our convertible preferred stock outstanding as
of June 30, 1999 into 66,201,914 shares of our common stock upon the
closing of this offering; and
. a 1 for reverse stock split to be effected immediately prior to
consummation of this offering.
References in this prospectus to "MotherNature.com," "we," "our" and "us"
refer to MotherNature.com, Inc., a Delaware corporation. References to the
"offering" refer to the initial public offering of our common stock being made
by this prospectus. We were incorporated in Pennsylvania in December 1995 and
we reincorporated in Delaware in June 1998. We have applied for federal
registration for, among others, the marks "MotherNature.com" combined with the
MotherNature.com logo, the MotherNature.com logo, "Go Ask Mother@" and "Your
Healthy Living Headquarters." All other trademarks, trade names and service
marks appearing in this prospectus are the property of their respective owners.
3
Summary Financial Data
The following tables set forth summary financial data for our company. You
should read this information together with the financial statements and the
notes to those statements appearing elsewhere in this prospectus and the
information under "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Year Ended Six Months Ended
December 31, June 30,
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1996 1997 1998 1998 1999
--------- --------- ----------- --------- ------------
(unaudited)
Statement of Operations
Data:
Net sales............... $ 21,489 $ 193,064 $ 476,549 $ 254,239 $ 954,650
Cost of sales........... 10,681 71,484 417,998 148,905 844,330
--------- --------- ----------- --------- ------------
Gross profit............ 10,808 121,580 58,551 105,334 110,320
Operating expenses...... 91,489 272,862 6,733,716 769,862 15,417,331
--------- --------- ----------- --------- ------------
Operating loss.......... (80,681) (151,282) (6,675,165) (664,528) (15,307,011)
Net loss................ $ (80,681) $(159,532) $(6,610,684) $(661,391) $(15,000,492)
========= ========= =========== ========= ============
Basic and diluted net
loss per common share.. $(0.05) $(0.03) $(1.32) $(0.13) $(2.69)
========= ========= =========== ========= ============
Pro forma basic and
diluted net loss per
common share(1)(2)..... $(0.05) $(0.03) $(0.36) $(0.09) $(0.26)
========= ========= =========== ========= ============
Shares used to compute
basic and diluted net
loss per common
share(1)............... 1,469,593 4,855,479 5,017,613 5,000,000 5,566,430
Shares used to compute
pro forma basic and
diluted net loss per
common share(1)(2)..... 1,469,593 4,855,479 18,507,968 7,370,344 57,280,112
June 30, 1999
--------------------------
Pro Forma
Actual As Adjusted(3)
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(unaudited)
Balance Sheet Data:
Cash and cash equivalents............................ $39,683,712
Working capital...................................... 37,863,146
Total assets......................................... 41,605,003
Total long-term debt, net of current portion......... 17,691
Total convertible preferred stock.................... 647,450
Total shareholders' equity........................... 38,940,779
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(1) Please see the financial statements and the notes to those statements
appearing elsewhere in this prospectus for the determination of shares used
in computing basic and diluted net loss per common share and pro forma
basic and diluted net loss per common share.
(2) The pro forma data give effect to the conversion of all of our convertible
preferred stock outstanding as of June 30, 1999 into 66,201,914 shares of
our common stock upon the closing of this offering.
(3) The pro forma as adjusted data give effect to the conversion of all of our
convertible preferred stock outstanding as of June 30, 1999 into 66,201,914
shares of our common stock upon the closing of this offering and reflect
the sale of shares of common stock by us in this offering at an assumed
initial public offering price of $ per share after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
4
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You should
carefully consider the following information about these risks, together with
the other information contained in this prospectus, before you decide whether
to buy our common stock. If any of the following risks actually occur, our
business, results of operations and financial condition would likely suffer. In
any such case, the market price of our common stock could decline, and you may
lose all or part of the money you paid to buy our common stock.
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties, including those not presently known to us
or that we currently deem immaterial, may also impair our business.
Risks Related to Our Business
Our business is difficult to evaluate because we have a limited operating
history under our current business model.
We have a limited operating history upon which you can evaluate our business.
Although we were organized in December 1995, our current management team joined
us after June 1998 and our current, redesigned Web site was launched in late
1998. Accordingly, an investor in our common stock must consider the
challenges, risks and uncertainties frequently encountered by early-stage
companies using new and unproven business models in new and rapidly evolving
markets. These challenges include our ability to:
. execute on our business model;
. increase brand recognition;
. manage growth in our operations;
. expand our customer base cost-effectively;
. retain customers;
. manage inventory levels effectively;
. upgrade and enhance our Web site, transaction-processing systems, order
fulfillment infrastructure and inventory management systems;
. access additional capital when required;
. develop and renew strategic relationships with companies in the VSM and
natural products industry, such as suppliers and content providers; and
. attract and retain key personnel.
We cannot be certain that our business model will be successful or that we will
successfully address these and other challenges, risks and uncertainties.
5
Consumers of VSM and other natural products may not purchase products from our
site, which would reduce our revenues and prevent us from becoming profitable.
If we do not attract and retain a high volume of online customers at a
reasonable cost, we will not be able to increase our revenues or achieve
profitability. We may not be able to convert a large number of customers from
traditional shopping methods to online shopping for VSM and other natural
products. Even if we are successful at attracting online customers, we expect
it will take several years to build a critical mass of these customers.
Specific factors that could prevent widespread customer acceptance of our store
include:
. lack of consumer awareness of our online store;
. customer concern about the security of online transactions and the
privacy of personal health information;
. shipping charges, which are not incurred when shopping at traditional
stores;
. delivery time associated with Internet orders, as compared to the
immediate receipt of products at traditional stores;
. pricing that does not meet customer expectations;
. incorrectly filled orders or damaged products;
. delayed response to customer service requests; and
. difficulty in returning or exchanging orders.
We have a history of losses and anticipate future losses.
As of June 30, 1999, we had an accumulated deficit of approximately $21.9
million, and we have not achieved profitability. We incurred net losses of
approximately $15.0 million for the six months ended June 30, 1999 and
approximately $6.6 million for the fiscal year ended December 31, 1998. We
launched our current Web site in late 1998 and began our current advertising
campaign in March 1999. We believe that we will continue to incur operating
losses for the foreseeable future and that the rate at which we will incur such
losses will increase significantly from current levels. We intend to
substantially increase our costs and operating expenses related to:
. intensifying our brand development efforts through advertising and other
marketing activities;
. expanding our product offerings and Web site content;
. providing promotional benefits to our customers, such as product
discounts and free shipping on large orders;
. upgrading our Web site, transaction-processing systems, order
fulfillment infrastructure and inventory management systems;
. expanding our distribution and warehousing facilities;
. developing and renewing strategic relationships with companies in the
VSM and natural products industry, such as content providers and
vendors; and
. employing additional personnel as our business expands.
Because we will spend these amounts before we receive any incremental
revenues from these efforts, our losses will be greater than the losses we
would incur if we developed our business more slowly. In addition, we may find
that these efforts are more expensive than we currently anticipate, which would
further increase our losses.
6
Disappointing quarterly revenue or operating results could cause our stock
price to fall.
If our quarterly revenue or operating results fall below investor or
securities analyst expectations, our stock price could fall substantially.
Because of our limited operating history under our current business model, it
is difficult to accurately forecast our revenues and operating results. In
addition, we do not yet have sufficient historical data on how successful our
business model will be, and we cannot currently forecast revenue from regular
customers or accurately predict revenue trends. We believe that quarter-to-
quarter comparisons of our operating results are poor predictors of our future
performance. Our quarterly revenue and operating results have fluctuated
significantly in the past and may fluctuate significantly in the future due to
a variety of factors, including:
. fluctuations in the number of visitors to our Web site and our ability
to convert visitors into customers;
. demand for our products;
. our use of advertising, discount pricing and promotions;
. amount and timing of our operating costs and capital expenditures;
. introductions by our competitors of new or enhanced Web sites, products
or services;
. fluctuations in shipping costs or delivery times;
. management of our inventory levels and fulfillment operations;
. price competition and fluctuations in the wholesale prices of the
products we sell;
. changes in the mix of products we sell;
. shifts in research findings, media publicity and consumer perception
regarding VSM products;
. costs related to potential strategic relationships or acquisitions of
content, technology or businesses;
. changes in or enforcement of government regulations affecting our
business;
. changes in our management team and key personnel; and
. fluctuations in general economic conditions and economic conditions
specific to the Internet, electronic commerce and the VSM and natural
products industries.
Our limited operating history makes it difficult to assess the impact of
these factors on our operating results. One or more of these factors could
reduce our gross margins and harm our operating results in future periods.
Government regulations may restrict the way we sell our products and impair our
operations.
The packaging, labeling, advertising, distribution and sale of most of our
products are subject to extensive federal, state and local regulation. The
federal agencies which regulate our business include primarily the United
States Food and Drug Administration, or FDA, and the Federal Trade Commission,
or FTC. State health agencies and attorneys general have parallel authority to
federal agencies and also could exercise jurisdiction over our products or
business practices. The laws, regulations and enforcement policies governing
our dietary supplement products are relatively new and still evolving. In
general, the dietary supplement industry has adopted more aggressive
interpretations of these laws than have the relevant regulatory agencies. We
cannot be
7
certain that our attempts, or those of our suppliers, to comply with laws and
regulations in this area are or will be deemed sufficient by the appropriate
regulatory agencies. Enforcement actions by any of these agencies can result in
civil and criminal penalties, an injunction to stop or modify certain selling
methods, seizure of our products, adverse publicity or voluntary recalls and
labeling changes. If the FDA, FTC or other federal or state governmental agency
were to undertake an enforcement action against us, it would harm our business.
State professional licensing bodies also may object to the provision of health-
related information or advice on our site.
The law relating to the sale of most of our products, especially over the
Internet, remains largely unsettled and we cannot predict what enforcement
positions the FDA or other governmental agencies may take with respect to our
selling methods. The FDA has indicated that claims or statements made on a
company's Web site about dietary supplements may constitute "labeling" and thus
be subject to regulation. For example, the FDA may determine that, under
certain circumstances, the integration of content describing the health
benefits of dietary supplements with the sale of those supplements violates
labeling restrictions applicable to such products. If the FDA makes that
determination, products that would otherwise be considered supplements could
then be deemed to be unapproved and, therefore, illegal drugs. In particular,
the FDA may limit the claims that can be made, or information that can be used,
discussing or implying the benefits of dietary supplements with respect to
certain health conditions. Under applicable law, "statements of nutritional
support" may be used in dietary supplement labeling provided the statements do
not state drug claims, i.e., a claim that the supplement will diagnose,
mitigate, treat, cure or prevent a disease. It is possible that the statements
presented with initial product descriptions on our site may be determined by
the FDA to be drug claims rather than acceptable statements of nutritional
support. In addition, some of our suppliers may incorporate objectionable
statements directly in their product names or on their products' labels, or
otherwise fail to comply with applicable manufacturing, labeling and
registration requirements for over-the-counter or homeopathic drugs or dietary
supplements. As a result, we may have to remove objectionable statements or
products from our site or modify these statements, or product names or labels,
in order to comply with FDA regulations. Such changes could interfere with our
marketing of products and could harm our business.
In addition, the FDA permits the dissemination of third-party literature in
connection with the sale of dietary supplements in establishments if, among
other things, there is physical separation between such literature and
supplements. It is not yet clear how this restriction may apply to online
retailers. Because of the evolving regulatory regime for supplements, we cannot
assure you that the way in which we present information about products on our
site would be determined to be lawful by the FDA. As a result, we may have to
remove objectionable literature from our site or modify our selling methods in
order to comply with any FDA enforcement actions, which could harm our
business.
The FTC has the right to monitor and regulate our advertising and has pursued
numerous manufacturers and retailers of dietary supplements for deceptive
advertising or failure to substantiate promotional claims. Moreover, the FTC is
implementing a recent initiative to monitor and bring enforcement actions
against Web sites that may be disseminating false or unsubstantiated health
claims. In addition, our activities are regulated by various agencies of the
states--including state medical, pharmacy or dietician licensing bodies--
localities and foreign countries in which our customers reside. Our efforts to
comply with existing laws and regulations may be costly, may force us to change
our selling strategy and may not be successful. We cannot assure you that we
will be able to comply with any future laws, regulations, interpretations or
applications without incurring significant costs or adjusting our business
model. A more detailed discussion of the government regulations affecting our
business is included in this prospectus under the heading "Business--Regulatory
Environment."
Our brand may not achieve the broad recognition necessary for our business to
succeed.
We believe that broader recognition and favorable consumer perception of the
MotherNature.com brand are essential to our future success. Due to the early
stage and competitive nature of the online market for VSM and other natural and
healthy living products, if we do not establish our brand quickly, we may lose
the opportunity to build a critical mass of customers. Accordingly, we have
spent and intend to continue to spend
8
significant amounts on an aggressive brand-enhancement strategy, which includes
advertising, promotional programs and public relations activities. Our brand
promotion efforts may not be successful or may not sufficiently increase our
revenues to cover our advertising and promotional expenses. In addition, even
if our brand recognition increases, the number of new users or transactions in
our online store may not increase.
We may fail to compete effectively in our market.
Increased competition in our market may result in lower revenues due to price
reductions or loss of market share. The electronic commerce industry is new,
rapidly evolving and intensely competitive, and we expect competition to
intensify in the future. Barriers to entry are minimal and current and new
competitors can launch sites at a relatively low cost. In addition, the VSM and
natural and healthy living products market is very competitive and highly
fragmented, with no clear dominant leader and increasing public and commercial
attention. We may not be able to compete successfully, or competitive pressures
may hurt our business. If we fail to attract and retain a large customer base
and our competitors establish a market position more prominent than ours, we
will not be able to grow our business. We compete with a variety of other
companies, including:
. traditional VSM and natural and healthy living products retailers,
including General Nutrition Centers and Vitamin Shoppe;
. the online retail initiatives of several traditional VSM and natural and
healthy living products retailers, including VitaminShoppe.com and
Vitamins.com;
. online retailers of pharmaceutical products which also carry VSM and
natural and healthy living products, including Drugstore.com,
PlanetRx.com and CVS.com;
. independent online retailers specializing in VSM and natural and healthy
living, including Greentree Nutrition, Inc., HealthShop.com, eNutrition,
allherb.com, vitamins.net and Vitanet;
. mail-order and catalog retailers of VSM and natural and healthy living
products, including NBTY, Amrion, Rexall Sundown and Vitamin Shoppe,
some of which have already developed online retail outlets; and
. direct sales organizations, retail drugstore chains, health and natural
food store merchants, mass market retail chains and various
manufacturers of natural products.
Many of our competitors have longer operating histories, larger customer or
user bases, greater brand recognition and significantly greater financial,
marketing and other resources than we have. In addition, larger, well
established and well financed entities may acquire, invest in or form joint
ventures with our online competitors as the use of the Internet and other
online services increases. Increased competition from these or other
competitors could harm our business.
If we are unable to manage our growth and the related expansion in our
operations effectively, our business may be harmed.
We have experienced rapid growth in our operations and expect to continue to
increase the scope of our operations. This growth has placed, and our
anticipated future operations will continue to place, a significant strain on
our management, information systems and other resources. We will not be able to
implement our business model in a rapidly evolving market without an effective
planning and management process.
Our success in managing our rapid growth will depend in part on our ability
to continue to attract, integrate and retain skilled technical, managerial,
editorial, merchandising, marketing and customer service personnel. The number
of our employees has increased from 10 at December 31, 1997 to 40 at December
31, 1998, and to 112 at June 30, 1999. Our senior management team, including
our Chief Executive Officer, Chief Financial Officer, Chief Technology Officer,
Chief Knowledge Officer, Vice President, Sales and Site Operations and Vice
President, Brand Marketing, has joined us in the last thirteen months. We
expect that we will need to add additional key personnel in the near future.
Further, many of our senior management have no prior senior management
experience at public companies.
9
Our ability to improve existing and implement new operational, financial and
management controls, reporting systems and procedures also will be fundamental
to our ability to manage our rapid growth. We recently installed a new
accounting and financial reporting system and are currently in the process of
integrating this system with our other information systems.
Moreover, our future success will depend in part on our ability to rapidly
expand our Web site, transaction-processing systems, order fulfillment
infrastructure and inventory management systems without any systems
interruptions in order to accommodate increased traffic and demand. We are
currently implementing new technical and operational systems, including a new
order processing, inventory management, shipping and billing software package
to accommodate anticipated increases in customer traffic and order demand. Any
inability to scale our systems may cause unanticipated system disruptions,
slower response times, degradation in customer service levels, impaired quality
and speed of order fulfillment, or delays in reporting accurate financial
information. We are not certain that we will be able to project the rate or
timing of increases, if any, in the use of our Web site accurately or promptly
enough to permit us to effectively upgrade and expand our transaction-
processing systems or to integrate smoothly any newly developed or purchased
modules with our existing systems.
If we do not successfully expand our distribution operations, our revenues may
fall below expectations.
Our success depends on our ability to rapidly expand our distribution
operations and related information systems in order to accommodate an expected
increase in customer orders. If we do not successfully expand our distribution
operations to accommodate increases in demand, we will not be able to increase
our revenues in accordance with the expectations of securities analysts and
investors.
The planned expansion of our distribution operations may cause disruptions in
our business. Our historical distribution operations in Southhampton,
Pennsylvania were not adequate to accommodate significant increases in customer
demand. We recently leased a second distribution facility in Springfield,
Massachusetts, from which we began distributing products in July 1999. Our
ability to effectively process and ship customer orders from this new facility
is uncertain. If we do not effectively manage the transition to our new
distribution center, we could lose customers.
Expanding the breadth and depth of our product and service offerings is
expensive and difficult, and these efforts may not be profitable.
We intend to expand the number of products we offer on our site by promoting
new or complementary products or services. Expansion of our offerings in this
manner will require significant additional expenditures and could strain our
management, financial and operational resources. For example, we may need to
incur significant marketing expenses, develop relationships with new
fulfillment partners or manufacturers or comply with new regulations. We cannot
be certain that we will be able to expand our product and service offerings in
a cost-effective or timely manner. Furthermore, any new product or service
offering that is not favorably received by consumers could damage the
reputation of our brand. The lack of market acceptance of our efforts to expand
offerings or our inability to generate satisfactory revenues from such expanded
offerings could harm our business.
Our existing technical and operational systems could fail.
We have experienced periodic systems interruptions which we believe may
continue to occur. Our systems and operations, including our fulfillment
operations, are vulnerable to damage or interruption from fire, flood,
earthquake, power loss, telecommunications failure, break-ins, vandalism and
similar events. Substantially all of our product development and information
management systems are in facilities we lease in Massachusetts. All of our
inventory is stored in facilities we lease in Pennsylvania and Massachusetts.
In addition, substantially all of our computer and communications hardware
systems are located at a third-party facility in Andover, Massachusetts. We
have no formal disaster recovery plans, and our insurance may not adequately
compensate
10
us for losses that may occur. The occurrence of a natural disaster or other
unanticipated problems at our facilities in Massachusetts or Pennsylvania, or
at the third-party facility in Andover, Massachusetts, could cause
interruptions or delays in our business or data loss, or could render us unable
to accept and fulfill customer orders. In addition, any failure by the third-
party facility to provide the data communications capacity we require could
result in interruptions in our service. The occurrence of any of these events
could harm our business.
The success of our business operations depends on the continuing contribution
of our key personnel.
Our future success depends to a significant extent on the continued services
and performance of our senior management and other key personnel, particularly
Michael I. Barach, our President, Chief Executive Officer and a director, and
Donald Pettini, our Chief Technology Officer. We do not have employment
agreements with any of our officers or key employees. This means that any
officer or employee can terminate his or her relationship with us at any time.
We also do not have "key person" life insurance policies covering any of our
employees. We may be unable to retain our key employees or attract, assimilate
or retain other highly qualified employees in the future. The loss of the
services of Mr. Barach, Mr. Pettini or any of our other executive officers or
key employees could harm our business.
The loss of third-party content providers could adversely impact our ability to
generate sales.
We believe that consumers become interested in purchasing our products in
part because of the information we include on our Web site regarding health
conditions, herbal and homeopathic remedies, drug interactions and our
products. Much of this information is licensed from third parties and could
cease to be available to us or could be available only at a higher cost. The
loss of this content could require us to develop similar content or to obtain
content that is of lower quality or at a higher cost. In addition, we cannot be
certain that we will be able to license additional content on favorable terms
or at all. Increases in fees paid to our information providers or our failure
to license sufficient content could adversely impact our ability to generate
sales.
We depend on a limited number of third-party suppliers for the products we
require to meet customer demands.
Our business depends on the ability of a limited number of third-party
vendors to provide us with the products, including our private label products,
that we sell. In 1998, two suppliers accounted for 51% of our inventory
purchases, and in 1997, one of those suppliers accounted for 44% of the
inventory we purchased. Furthermore, we purchase nearly all of our private
label products through one supplier. We do not have long-term contracts with
any of our suppliers. If we fail to develop or maintain our relationships with
these or our other vendors, the products we offer could cease to be available
to us or could be available only at higher cost or after a long delay. We
cannot be certain that in the future we will be able to procure sufficient
quantities of our products on acceptable commercial terms.
The failure of third-party delivery services to promptly deliver products would
harm our business.
We rely on third-party carriers for product shipments, including shipments to
and from our fulfillment facility. We are therefore subject to the risks,
including employee strikes and delays due to inclement weather, associated with
these carriers' ability to provide delivery services to meet our shipping
needs. Failure to deliver products to our customers in a timely manner would
harm our business.
We may be subject to product liability claims.
Like other retailers, distributors and manufacturers of products that are
ingested, we face an inherent risk of exposure to product liability claims in
the event that the use of the products we sell results in injury. We may be
subjected to various product liability claims, including claims that the
products we sell contain
11
contaminants, are improperly labeled or include inadequate instructions as to
use or inadequate warnings concerning side effects and interactions with other
substances. We cannot predict whether product liability claims will be brought
against us in the future or if the resulting adverse publicity would harm our
business. Moreover, we may not have adequate resources in the event of a
successful claim against us. We do not maintain product liability insurance and
do not have formal indemnification arrangements with the third-party vendors
from which we source our products. Further, our general liability insurance may
not cover product liability claims. If our insurance protection is inadequate
and we are not indemnified by our third-party vendors, the successful assertion
of product liability claims against us could harm our business.
Although many of the ingredients in our products are vitamins, minerals,
herbs and other substances for which there is a long history of human
consumption, some of our products contain innovative ingredients or
combinations of ingredients. There is little long-term experience with human
consumption of some of these innovative product ingredients or combinations in
concentrated form. In addition, interactions of these products with other
similar products, prescription medicines and over-the-counter drugs have not
been fully explored. Although the manufacturer may perform research and tests
in connection with the formulation and production of the products that we sell,
there are no conclusive clinical studies regarding many of our products.
We may be liable for content we provide on our Web site or which is accessed
from our Web site.
We believe that our future success will depend in part upon our ability to
deliver original and compelling descriptive content about health conditions,
herbal and homeopathic remedies, drug interactions and the products that we
sell. As a publisher of Internet content, we face potential liability for
negligence, copyright, patent or trademark infringement, defamation or other
claims based on the nature and content of materials that we publish or
distribute. In the past, plaintiffs have brought such claims and sometimes
successfully litigated them against online services. Although we carry general
liability insurance, our insurance may not cover claims of these types or may
be inadequate to indemnify us for all liability imposed on us. Our business
would be harmed and we could be exposed to potentially significant monetary
damages if we were held liable based on our Internet content.
We face inventory risk.
We plan to increase the number and range of products that we stock in
inventory in order to ensure that we can promptly deliver products to our
customers. In addition, the market for nutritional supplements is characterized
by sudden changes in consumer tastes. We must accurately predict these trends
and stock sufficient quantities of popular vitamins, supplements, minerals and
other products and not overstock unpopular products. Many of our products have
a limited shelf life, and we may be unable to sell inventory that we have
stored for an extended period of time. In the event that one or more of the
products we stock do not achieve widespread consumer acceptance, we may be
required to take inventory markdowns. Failure to properly manage the growth of
our inventory levels will harm our business.
Unfavorable publicity regarding nutritional supplements could harm our
business.
We believe the VSM market is affected by national media attention regarding
the consumption of nutritional supplements. Future research reports or
publicity that are perceived as less favorable or that question earlier
research or publicity could harm our business. Because of our dependence upon
consumer perceptions, adverse publicity associated with illness or other
undesirable effects resulting from the consumption of the products we sell or
any similar products distributed by other companies, whether or not accurate,
also could damage the trust our customers have in our products and would harm
our business. Unfavorable publicity could arise even if the adverse effects
associated with products resulted from consumers' failure to consume such
products appropriately.
12
We face risks associated with potential acquisitions of complementary
companies, products or technologies.
We may make investments in or acquire complementary companies, products or
technologies. We may not realize the anticipated benefits of these investments
or acquisitions, and these transactions could be detrimental to our business.
If we buy a business, we could have difficulty assimilating its personnel and
operations, or the key personnel of the acquired business may decide not to
work for us. We also could have difficulty assimilating acquired technology or
products into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
Furthermore, we may have to incur debt or issue equity securities to pay for
any future acquisitions or investments, the issuance of which could be dilutive
to our existing stockholders.
We need to continue to establish and maintain strategic relationships with
other Internet companies.
We depend on distribution relationships with Internet companies which have
high-traffic Web sites for a portion of our traffic. There is intense
competition for placement on these sites, and we may not be able to enter into
distribution relationships on commercially reasonable terms or at all. Even if
we enter into distribution relationships with these Web sites, they may not
attract significant numbers of users or increase traffic to our Web site.
We may be unable to protect adequately our intellectual property.
Our trademarks, service marks, copyrights, trade dress, trade secrets and
similar intellectual property are critical to our success. We rely upon a
combination of trademark and copyright law, trade secret protection and
confidentiality or license agreements with our employees, affiliates and others
to protect our proprietary rights. We have submitted trademark and service mark
applications for our name combined with our logo, and these applications are
pending. Effective trademark, service mark, copyright and trade secret
protection may not be available, and the steps we have taken and may take in
the future to protect our proprietary rights may not be adequate. For instance,
we may not be able to register our name combined with our logo as a federal
trademark because there are other companies using the words "mother nature" who
may have prior rights in those words. In addition, we may not be able to
prevent other people from using the words "mother nature" in their businesses.
It is possible that others could use the words "mother nature" in such a way as
to damage the goodwill associated with our business, which could harm our
business. The unauthorized reproduction or other misappropriation of our
trademarks or other intellectual property could diminish the value of our
proprietary rights or goodwill. In addition, we license our trademarks and
other intellectual property to third parties, and we cannot be certain that
such licensees will not take actions that harm the value of our proprietary
rights. The failure to protect our intellectual property adequately could harm
our business.
The legal protection of our domain names is uncertain.
We currently hold several Web domain names relating to our brand, including
"mothernature.com." The acquisition and maintenance of domain names generally
is regulated by governmental agencies and their designees. The regulation of
domain names in the United States and abroad is expected to change in the near
future. Governing bodies may establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. As a result, we may be unable to acquire or maintain relevant domain
names in all countries in which we conduct business. Furthermore, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may be
unable to prevent third parties from acquiring domain names that are similar
to, infringe upon or otherwise decrease the value of our domain names,
trademarks and other proprietary rights.
13
Year 2000 risks may disrupt our operations.
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year
2000 problem. These failures or miscalculations could cause disruptions of our
operations, including a temporary inability to process customer orders, operate
our Web site or engage in similar ordinary business activities.
Our operations also depend on the performance of operating software and
systems used by our vendors and service providers. We cannot assure you that
our vendors and service providers have, or will have, operating software and
systems that are year 2000 compliant. Year 2000-related failures in the
software or systems of our vendors or third-party service providers could
interrupt our operations or require us to incur significant unanticipated
expenses. Such disruptions could harm our business. In addition, disruptions
caused by year 2000 problems could affect Internet usage generally, which also
could harm our business.
Our inability to adapt to rapid technological change may harm our business.
To remain competitive, we must continue to enhance and improve the
functionality and features of our online store. If our competitors introduce
new products and services embodying new technologies, or if new industry
standards and practices emerge, our existing Web site and proprietary
technology and systems may be rendered obsolete. Our future success will depend
on our ability to:
. enhance our existing services;
. internally develop and/or license from third parties new services and
technologies; and
. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
We may use new technologies ineffectively or fail to adapt our Web site,
transaction-processing systems, order fulfillment infrastructure and inventory
management systems to customer requirements or emerging industry standards. If
we experience delays in introducing new services, products and enhancements,
our customers may forego the use of our services and use those of our
competitors. Failure to react effectively to technological change could harm
our business.
We do not expect to pay dividends, and investors should not buy our common
stock expecting to receive dividends.
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends in the foreseeable
future. You should not purchase our common stock with the expectation of
receiving cash dividends.
We are subject to anti-takeover provisions in our charter, by-laws and Delaware
law that could delay or prevent an acquisition of our company, even if the
acquisition would be beneficial to our stockholders.
Certain provisions of our certificate of incorporation, our by-laws and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. For additional information
on these anti-takeover provisions, please refer to the information in this
prospectus under the heading "Description of Securities."
14
Risks of Doing Business Over the Internet
We depend on continued use of the Internet and growth of the online VSM and
other natural and healthy living products market.
Our future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the Internet as an effective medium of
business and communication by our target consumers. Rapid growth in the use of
and interest in the Internet has occurred only recently. As a result,
acceptance and use may not continue to develop at historical rates, and a
sufficiently broad base of consumers may not adopt, and continue to use, the
Internet and other online services as a medium of commerce.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. Our success
will depend, in large part, upon third parties maintaining the Internet
infrastructure to provide a reliable network backbone with the speed, data
capacity, security and hardware necessary for reliable Internet access and
services.
Further, the online market for VSM and other natural and healthy living
products is in its infancy. The market is significantly less developed than the
online market for books, auctions, music, software and numerous other consumer
products. Even if use of the Internet and electronic commerce continues to
increase, the rate of growth, if any, of the online VSM and other natural and
healthy living products market could be significantly less than the online
market for other products. Our rate of revenue growth could therefore be
significantly less than that of other online merchants.
We are exposed to risks associated with electronic commerce security and credit
card fraud.
Consumer concerns regarding the security of transactions conducted on the
Internet and users' privacy may inhibit the growth of use of the Internet and
electronic commerce. To transmit confidential information securely, such as
customer credit card numbers, we rely on encryption and authentication
technology that we license from third parties. We cannot predict whether we
will experience compromises or breaches of the technologies we use to protect
customer transaction data. Furthermore, our servers may be vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions. We
may need to expend significant additional capital and other resources to
protect against security breaches or alleviate problems caused by any such
breaches. We cannot guarantee that security breaches will not occur, and if our
security measures fail, our business could be harmed. Any penetration of our
network security or misappropriation of our users' personal or credit card
information could subject us to liability. We may be liable for claims based on
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. Claims also could be based on other misuse of personal
information, including use for unauthorized marketing purposes. These claims
could result in litigation.
Under current credit card practices, merchants are liable for fraudulent
credit card transactions where, as is the case with the transactions we
process, the merchant does not obtain a cardholder's signature. A failure to
adequately control fraudulent credit card transactions would harm our business.
Privacy concerns may limit the information we can gather.
Web sites typically place "cookies" on a user's hard drive without the user's
knowledge or consent. We use cookies for a variety of reasons, including the
collection of data derived from the user's Internet activity. Most currently
available Web browsers allow users to remove cookies at any time or to prevent
cookies from being stored on their hard drives. In addition, some commentators,
privacy advocates and governmental bodies have suggested limiting or
eliminating the use of cookies. Any reduction or limitation in the use of
cookies could limit the effectiveness of our sales and marketing efforts. For
example, the European Union recently
15
adopted a directive addressing data privacy that may limit the collection and
use of certain information regarding Internet users. This directive may limit
our ability to target advertising or collect and use information in certain
European countries. In addition, the FTC and several states have investigated
the use by certain Internet companies of personal information. We could incur
significant additional expenses if new regulations regarding the use of
personal information are introduced or if our privacy practices are
investigated.
Our business is subject to government regulation of the Internet and other
legal uncertainties which could negatively impact our operations.
Statutes and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. The law remains largely
unsettled, however, even in areas where there has been legislative action.
Congress recently passed laws regarding online children's privacy, copyrights
and taxation. Existing or future legislation could dampen growth in use of the
Internet. In addition, we do not currently collect sales or other similar taxes
for physical shipments of goods into states other than Massachusetts and
Pennsylvania. However, local, state or foreign jurisdictions may seek to impose
sales tax collection obligations on us. If one or more states or any foreign
country successfully asserts that we should collect sales or other taxes on the
sale of our products, it could negatively affect our revenues and business. It
may take years to determine whether and how existing laws governing
intellectual property, privacy, libel and taxation apply to the Internet,
electronic commerce and online advertising. In addition, the growth and
development of electronic commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad. The adoption or
modification of laws or regulations applicable to the Internet could negatively
impact our operations.
Risks Associated with this Offering
Our management has broad discretion over the use of proceeds from this
offering.
Presently, we intend to use the majority of the proceeds from this offering
for increased advertising and marketing expenditures. The remaining proceeds
will be used to fund operating losses and for general corporate purposes,
including expanding our product and service offerings, enhancing our
infrastructure and working capital. We also may use a portion of the proceeds
to expand our business through strategic alliances and acquisitions. We have
not yet determined the amount of net proceeds to be used specifically for any
of the foregoing purposes. As a result, investors in this offering will be
relying on management's judgment with only limited information about its
specific intentions regarding the use of proceeds. We cannot assure you that
the proceeds will be invested to yield a favorable return. Additional
information regarding the ways in which we intend to spend the proceeds of this
offering is included in this prospectus under the heading "Use of Proceeds."
Our officers and directors will control % of our common stock and will be able
to significantly influence corporate actions.
After this offering, our executive officers, directors and entities
affiliated with them will control approximately % of our common stock. As a
result, these stockholders, acting together, will be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions.
There is no prior public market for our common stock, and you may not be able
to resell shares of our common stock for a profit.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The
16
initial public offering price for the shares will be determined by negotiations
between us and the representatives of the underwriters and may not be
indicative of prices that will prevail in the trading market. The market price
of the common stock may decline below the initial public offering price. A more
detailed discussion of the factors to be considered in determining the initial
public offering price is included in this prospectus under the heading
"Underwriting."
We are likely to require additional financing and may not be able to raise
additional financing on favorable terms or at all.
We currently anticipate that the net proceeds of this offering, together with
current cash and cash equivalents, will be sufficient to meet our anticipated
needs for advertising and marketing expenditures, funding operating losses and
general corporate purposes through at least the next 12 months. We anticipate
that we are likely to need additional financing to execute on our business
model thereafter or sooner if we need to respond to business contingencies.
Such contingencies may include the need to:
. fund additional advertising expenditures;
. develop new or enhance existing site content, features or services;
. enhance our operating infrastructure;
. respond to competitive pressures; or
. acquire complementary businesses or necessary technologies.
If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
and these newly-issued securities may have rights, preferences or privileges
senior to those of existing stockholders, including those acquiring shares in
this offering. We cannot assure you that additional financing will be available
on terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance our site content,
features or services, or otherwise respond to competitive pressures would be
significantly limited. For a further discussion, please see "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
Market prices of emerging Internet companies have been highly volatile, and the
market for our stock may exhibit volatility as well.
The stock market has experienced significant price and trading volume
fluctuations, and the market prices of technology companies, particularly
Internet companies, have been extremely volatile. Recent initial public
offerings by Internet companies have been accompanied by exceptional share
price and trading volume changes in the first days and weeks after the
securities were released for public trading. Investors may not be able to
resell their shares at or above the initial public offering price. In the past,
following periods of volatility in the market price of a public company's
securities, securities class action litigation has often been instituted
against that company. Such litigation could result in substantial costs and a
diversion of management's attention and resources.
The reliability of the market data included in this prospectus is uncertain.
Since we are a relatively new company and operate in a new and rapidly
changing market, we have included market data in this prospectus from industry
publications, including Packaged Facts and International Data Communications.
Industry publications generally state that the information contained in these
publications
17
has been obtained from sources believed to be reliable, but that its accuracy
and completeness is not guaranteed. Although we believe market data used in
this prospectus is reliable, it has not been independently verified and we
cannot assure you of its reliability.
New investors will suffer immediate and substantial dilution in the net
tangible book value of their shares.
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. Therefore, you will
incur immediate dilution in net tangible book value of $ per share, assuming
an initial public offering price of $ per share. You may incur additional
dilution if holders of stock options exercise their options or if
warrantholders exercise their warrants to purchase common stock. Additional
information regarding the dilution to investors in our initial public offering
is included in this prospectus under the heading "Dilution."
The large number of shares eligible for public sale after this offering could
cause our stock price to decline.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in
the market after this offering or the perception that such sales could occur.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate. Please see the
information in this prospectus under the heading "Shares Eligible for Future
Sale" for a description of sales that may occur in the future.
Forward-looking statements contained in this prospectus may not be realized.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are often accompanied by words
such as "believe," "anticipate," "plan," "expect" and similar expressions.
These statements include statements about the market opportunity for online
sales of VSM and other natural and healthy living products, our business
strategy, competition and expected expense levels. Our actual results could
differ materially from those expressed or implied by these forward-looking
statements as a result of various factors, including the risk factors described
above and elsewhere in this prospectus.
18
USE OF PROCEEDS
Our net proceeds from the sale of shares of common stock offered by us are
estimated to be $ million, assuming an initial public offering price of $ per
share and after deducting underwriting discounts and commissions and estimated
offering expenses payable by us. If the underwriters' over-allotment option is
exercised in full, we estimate that the net proceeds we will receive will be $
million.
We intend to use the majority of the proceeds from this offering for
advertising and marketing expenditures. We intend to use the remaining proceeds
to fund operating losses and for general corporate purposes, including
expanding our product and service offerings, enhancing our infrastructure and
working capital.
We believe opportunities may exist from time to time to expand our current
business through strategic alliances or through acquisitions of complementary
companies, products or technologies. We may use a portion of the proceeds for
these purposes. We are not currently a party to any contracts, letters of
intent, commitments or agreements and are not currently engaged in active
negotiations with respect to any acquisitions.
We have not yet determined the amount of net proceeds to be used specifically
for any of the foregoing purposes. Accordingly, our management will have
significant flexibility in applying the net proceeds of the offering. Pending
the uses described above, we intend to invest the net proceeds in high-quality,
short-term, interest-bearing securities.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
inception and do not expect to pay any cash dividends for the foreseeable
future. We expect to use future earnings, if any, to finance expansion of our
business. Investors should not purchase our common stock with the expectation
of receiving cash dividends.
19
CAPITALIZATION
The following table shows our capitalization as of June 30, 1999:
. on an actual basis;
. on a pro forma basis to reflect the automatic conversion of all of our
convertible preferred stock outstanding as of June 30, 1999 into
66,201,914 shares of our common stock upon the closing of this offering;
and
. on a pro forma as adjusted basis to reflect the sale by us of the
shares of common stock offered by this prospectus at an assumed initial
public offering price of $ per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
This information should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operation" and our financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
June 30, 1999
--------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ------------ -----------
Long-term portion of notes payable and
capital lease obligations.............. $ 17,691 $ 17,691 $ --
Preferred stock:
Series A -- 23,811,358 shares
authorized; 23,316,097 shares issued
and outstanding actual; no shares
issued and outstanding pro forma and
pro forma as adjusted................ 233,160 -- --
Series B-1 -- 23,019,375 shares
authorized; 23,019,375 shares issued
and outstanding actual; no shares
issued and outstanding pro forma and
pro forma as adjusted................ 230,194 -- --
Series B-2 -- 1,800,000 shares
authorized; no shares issued and
outstanding actual, pro forma and pro
forma as adjusted.................... -- -- --
Series C -- 18,958,178 shares
authorized; 18,409,629 shares issued
and outstanding actual; no shares
issued and outstanding pro forma and
pro forma as adjusted................ 184,096 -- --
Common stock, $.01 par value, 86,000,000
shares authorized; 6,531,783 share
issued and outstanding actual;
72,733,697 shares issued and
outstanding pro forma; and shares
issued and outstanding pro forma as
adjusted............................... 65,318 727,337
Additional paid-in capital.............. 60,552,108 60,537,539
Deferred compensation................... (472,708) (472,708)
Accumulated deficit..................... (21,851,389) (21,851,389)
Total shareholders' equity (deficit).. 38,940,779 38,940,779
----------- ------------ ----
Total capitalization................ $38,958,470 $ 38,958,470 $
=========== ============ ====
20
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $(38,940,779),
or $(0.54) per share of common stock. Pro forma net tangible book value per
share represents the amount of total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding after giving effect
to the conversion of all shares of preferred stock. After giving effect to the
sale by us of shares of common stock offered by this prospectus at an
assumed initial public offering price of $ per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value as of June 30, 1999 would have
been approximately $ , or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution:
Assumed initial public offering price per share....................... $
Pro forma net tangible book value per share as of June 30, 1999...... $
Increase per share attributable to this offering.....................
---
Pro forma net tangible book value per share after this offering
attributable to new investors........................................
---
Net tangible book value dilution per share to new investors in this
offering............................................................. $
===
The following table summarizes, on a pro forma basis as of June 30, 1999, the
total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid to us by existing
stockholders and by new investors purchasing shares in this offering:
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ------------- ---
Existing stockholders... 72,733,697 % $61,307,253 % $0.84
New investors...........
---------- --- ----------- --- -----
Total................. 100% $ 100% $
========== === =========== === =====
The foregoing tables and calculations are based on shares outstanding on June
30, 1999 and:
. include 66,201,914 shares of common stock issuable upon the conversion
of all of our outstanding convertible preferred stock outstanding as of
June 30, 1999;
. exclude 7,628,247 shares of common stock issuable upon exercise of all
options outstanding under our 1998 Stock Plan as of June 30, 1999 with a
weighted average exercise price of $0.35 per share (819,850 of which
were exercisable on June 30, 1999); and
. exclude 1,207,317 shares of common stock issuable upon exercise of all
of our outstanding warrants outstanding as of June 30, 1999.
21
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes to those statements appearing elsewhere in
this prospectus and the information under "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The statement of operations
data for years ended December 31, 1996, 1997 and 1998, and the balance sheet
data at December 31, 1997 and 1998, are derived from our audited financial
statements appearing elsewhere in this prospectus. Interim results for the
periods ended June 30, 1998 and 1999 are derived from our unaudited financial
statements appearing elsewhere in this prospectus which, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of that data. Historical results
are not indicative of the results to be expected in the future.
Year Ended Six Months Ended
December 31, June 30,
--------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- ----------- --------- ------------
(unaudited)
Statement of Operations
Data:
Net sales............... $ 21,489 $ 193,064 $ 476,549 $ 254,239 $ 954,650
Cost of sales........... 10,681 71,484 417,998 148,905 844,330
--------- --------- ----------- --------- ------------
Gross profit.......... 10,808 121,580 58,551 105,334 110,320
Operating expenses:
Selling and
marketing............ 3,564 98,137 3,001,483 438,175 9,830,170
Product development... -- -- 2,135,570 8,672 3,101,587
General and
administrative....... 87,925 174,725 1,596,663 323,015 2,485,574
--------- --------- ----------- --------- ------------
Total operating
expenses............. 91,489 272,862 6,733,716 769,862 15,417,331
--------- --------- ----------- --------- ------------
Operating loss.......... (80,681) (151,282) (6,675,165) (664,528) (15,307,011)
--------- --------- ----------- --------- ------------
Interest income
(expense), net......... -- (8,250) 64,481 3,137 306,519
Net loss................ $ (80,681) $(159,532) $(6,610,684) $(661,391) $(15,000,492)
========= ========= =========== ========= ============
Basic and diluted net
loss per common
share(1)............... $(0.05) $(0.03) $(1.32) $(0.13) $(2.69)
========= ========= =========== ========= ============
Pro forma basic and
diluted net loss per
common share(1)(2)..... $(0.05) $(0.03) $(0.36) $(0.09) $(0.26)
========= ========= =========== ========= ============
Shares used to compute
basic and diluted net
loss per common
share(1)............... 1,469,593 4,855,479 5,017,613 5,000,000 5,566,430
Shares used to compute
pro forma basic and
diluted net loss per
common share(1)(2)..... 1,469,593 4,855,479 18,507,968 7,370,344 57,280,112
December 31, June 30, 1999
--------------------- ------------------------
Pro Forma as
1997 1998 Actual Adjusted(3)
-------- ----------- ----------- ------------
(unaudited)
Balance Sheet Data:
Cash and cash equivalents...... $ 4,241 $11,243,943 $39,683,712 $
Working capital (deficit)...... (65,439) 12,193,907 37,863,146
Total assets................... 90,306 13,461,613 41,605,003
Total long-term debt, net of
current portion............... 74,930 21,091 17,691
Total convertible preferred
stock......................... -- 463,354 647,450
Total shareholders' equity
(deficit)..................... (91,900) 12,579,472 38,940,779
- --------
(1) Please see the financial statements and the notes to those statements
appearing elsewhere in this prospectus for the determination of shares used
in computing basic and diluted net loss per common share and pro forma
basic and diluted net loss per common share.
(2) The pro forma data give effect to the conversion of all of our convertible
preferred stock into 66,201,914 shares of our common stock upon the closing
of this offering.
(3) The pro forma as adjusted data give effect to the conversion of all of our
convertible preferred stock outstanding as of June 30, 1999 into 66,201,914
shares of our common stock upon the closing of this offering and reflect
the sale of shares of common stock offered by us in this offering at an
assumed initial offering price of $ per share after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of our company should be read in conjunction with the financial statements and
the notes to those statements appearing elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties.
Overview
We are a leading online retail store and information site for vitamins,
supplements, minerals, or VSM, and other natural and healthy living products.
By offering approximately 13,000 products on our site, we provide one-stop
shopping for customers, 24 hours a day, seven days a week. Our online store,
www.MotherNature.com, offers educational and authoritative information, broad
product selection, a high level of customer service, competitive pricing and
easy-to-use navigation and search capabilities.
We were incorporated in the Commonwealth of Pennsylvania in December 1995 as
Mother Nature's General Store, Inc. Our founders worked for approximately three
years to establish distribution channels and an online presence as a retailer
of VSM and other natural and healthy living products. During that time, we
developed and managed our own Web site, built relationships with many vendors
in the VSM and natural and healthy living products industries, established our
private label line and opened our first distribution and customer service
center in Southampton, Pennsylvania. In early 1998, our founders sought to
secure additional financing to expand our business, promote our brand, invest
in infrastructure and technology improvements, and recruit a seasoned
management team to develop and execute on our business model. These efforts
resulted in the completion of our first round of venture capital financing in
June 1998. At that time we reincorporated in the State of Delaware, changed our
name to MotherNature.com, Inc. and began to recruit our current management
team.
Shortly after our new management team joined us, we launched our first major
online banner campaigns, including banner and button purchases on major portals
and shopping areas. In late 1998, we redesigned and launched our Web site,
which included an improved user interface, a more flexible, fully-featured
database structure and enhanced integration of content and merchandise. We have
continued to focus on building our organization, developing our technology
infrastructure, further developing and upgrading our Web site, increasing
customer traffic and sales, expanding our product assortment, promoting our
brand and enhancing our fulfillment and customer service operations. In early
1999, we invested in an aggressive, offline advertising campaign, supplemented
by online advertising, business incentive programs, direct marketing and public
relations.
The success of these efforts has been demonstrated by our growth in quarterly
revenues, which have increased from $105,000 in the fourth quarter of 1998, to
$251,000 in the first quarter of 1999, to $704,000 in the second quarter of
1999. In order to manage the increase in our site traffic and revenues, we have
expanded and continue to upgrade our site, fulfillment operations and
organizational infrastructure. This expansion to date includes enhancing the
features and functions on our site, adding server and database capacity,
building our internally developed fulfillment and logistics system and adding
to our management and employee team, which totaled 112 employees as of June 30,
1999.
In order to finance our rapid growth, we have raised a total of $61.2 million
in venture capital financing during the last 13 months from leading firms, such
as CMG@Ventures, Bessemer Venture Partners and North Castle Partners, which
have expertise in investing in both Internet and healthy living companies. In
addition, during this period we secured subordinated debt and lease financing
for up to $3.3 million, none of which has been drawn down to date.
Despite the growth in our revenues, we continue to incur significant net
losses. Through the first six months of 1999, we incurred a net loss of
approximately $15.0 million. We have not achieved profitability and expect to
incur operating losses for the foreseeable future. We also expect that the rate
at which we incur such
23
losses will increase significantly from current levels as we continue to incur
expenses related to intensifying our brand development, expanding our product
offerings and Web site content, providing promotional benefits to our
customers, enhancing and upgrading our Web site and our fulfillment and other
systems, expanding our distribution and warehousing facilities, developing and
renewing strategic relationships, and employing additional personnel.
We recognize revenue at the time of shipment. Cash is generally collected in
less than a week as a substantial portion of our sales are paid for by credit
card. Advertising expenditures are expensed as incurred.
Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net Sales. Net sales consist of product sales to customers net of product
returns, promotional discounts and coupons, and include shipping and handling
charges. Net sales increased 275% to $955,000 for the six months ended June 30,
1999 from $254,000 for the six months ended June 30, 1998. This increase was
attributable primarily to the significant growth of our customer base and an
increase in repeat purchases from our existing customers. We believe that the
increase in our customer base was primarily attributable to the implementation
of our offline marketing strategy.
Cost of Sales. Cost of sales consists primarily of the costs of merchandise,
including outbound shipping costs. Cost of sales does not include promotional
discounts and coupons used for new customer purchases, which are included in
selling and marketing expense. Cost of sales increased 467% to $844,000 for the
six months ended June 30, 1999 from $149,000 for the six months ended June 30,
1998. This increase was attributable primarily to our increased sales volume
and unreimbursed costs of shipping products to customers. Our gross margin
decreased to 12% of net sales for the six months ended June 30, 1999 from 41%
of net sales for the six months ended June 30, 1998. This decrease was due to a
number of factors, including increased sales discounts, product database
inconsistencies and more aggressive pricing strategies.
Selling and Marketing Expense. Selling and marketing expense consists
primarily of advertising and promotional expenditures, fulfillment facility
expenses and payroll and related expenses for personnel engaged in marketing,
fulfillment and customer service operations. Selling and marketing expenses
increased to $9.8 million for the six months ended June 30, 1999 from $438,000
for the six months ended June 30, 1998. This increase was attributable
primarily to expenditures related to our offline and online advertising
strategy and expenditures related to promotional discounts offered to attract
new customers. In addition, in the first six months of 1999, we hired a Chief
Marketing Officer and directors and managers for Business Development, Customer
Service and Fulfillment. We intend to continue to pursue an aggressive branding
and marketing campaign and, therefore, we expect selling and marketing expenses
to increase significantly in future periods.
Product Development Expense. Product development expense consists primarily
of payroll and related expenses for merchandising, Web site development, Web
content and design and information technology personnel and related
infrastructure. Product development expenses increased to $3.1 million for the
six months ended June 30, 1999 from $9,000 for the six months ended June 30,
1998. This increase was attributable primarily to increased staffing and
associated costs related to enhancing the features, content and functionality
of our online store and increasing the capacity of our transaction-processing
systems. We believe that continued investment in product development is
critical to attaining our strategic objectives and, therefore, we expect
product development expense to increase significantly in future periods.
General and Administrative Expense. General and administrative expense
consists of payroll and related expenses for executive and administrative
personnel, recruiting, professional fees, travel and other general corporate
expenses. General and administrative expenses increased to $2.5 million for the
six months ended June 30, 1999 from $323,000 for the six months ended June 30,
1998. This increase was attributable primarily
24
to increased headcount and related expense associated with additional
personnel. We believe general and administrative expenses will increase as we
expect to incur additional costs related to the growth of our business.
Interest Income (Expense). Interest income (expense), net consists of income
earned on our cash balances in money market accounts partially offset by
expenses attributable to capital lease obligations, commitment fees, warrant
financing and original issue discount related to notes payable. Interest income
(expense) increased to $307,000 for the six months ended June 30, 1999 from
$3,000 for the six months ended June 30, 1998. This increase was attributable
primarily to earnings on higher average cash and cash equivalent balances
during the first six months of 1999.
Provision for Income Taxes. We have had net operating losses for every period
through June 30, 1999. We may not be able to utilize all or any of these tax
loss carry-forwards as a result of this offering and prior financings. We have
not recognized a provision for income taxes due to the uncertainty surrounding
the realization of the favorable tax attributes in future tax returns and we
have placed a valuation allowance against our net deferred tax assets.
Net Loss. As a result of the foregoing factors, we incurred a net loss of
$15.0 million for the six months ended June 30, 1999 as compared to $661,000
for the six months ended June 30, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Net sales increased 147% to $477,000 in fiscal 1998 from $193,000
in fiscal 1997 as a result of the significant growth in our customer base and
repeat purchases from existing customers.
Cost of Sales. Cost of sales increased to $418,000 in fiscal 1998 from
$71,000 in fiscal 1997. This increase was attributable primarily to our
increased sales volume, a shift in our product mix toward lower margin products
and inconsistencies in our product database, as well as certain one-time
writedowns taken in the fourth quarter of 1998. As a result, our gross margin
decreased to 12% of net sales in fiscal 1998 from 63% of net sales in fiscal
1997.
Selling and Marketing Expense. Selling and marketing expense increased to
$3.0 million in fiscal 1998 from $98,000 in fiscal 1997. This increase was
attributable primarily to $1.9 million incurred in 1998 for online advertising
and an increase in staffing and associated costs, as we hired our Vice
President, Brand Marketing and directors of distribution and online marketing,
as well as several other employees needed to implement our marketing strategy.
Product Development Expense. Product development expense increased to $2.1
million in fiscal 1998. This increase was attributable primarily to $830,000
incurred for professional consulting services, $750,000 for the purchase of a
developed natural products database and Web site and an increase in staffing
and associated costs, as we hired our Chief Technology Officer, Executive
Producer and directors and managers of content and technology.
General and Administrative Expense. General and administrative expense
increased to $1.6 million in fiscal 1998 from $175,000 in fiscal 1997. This
increase was attributable primarily to expenditures incurred related to the
growth of our business, including computer hardware and software, recruiting
and legal expense as well as an increase in staffing and associated costs, as
we hired our Chief Executive Officer and Chief Financial Officer.
Interest Income (Expense). Interest income (expense), net increased to
$64,000 in fiscal 1998 from ($8,000) in fiscal 1997. This increase was
attributable primarily to interest income on higher average cash and cash
equivalent balances during fiscal 1998.
Net Loss. As a result of the foregoing factors, we incurred a net loss of
$6.6 million in fiscal 1998 as compared to $160,000 million in fiscal 1997.
25
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales increased to $193,000 in fiscal 1997 from $21,000 in
fiscal 1996, as a result of the significant growth in our customer base.
Cost of Sales. Cost of sales increased to $71,000 in fiscal 1997 from $11,000
in fiscal 1996. This increase was attributable primarily to an increase in
sales volume. Our gross profit increased from $11,000 in fiscal 1996 to
$122,000 in fiscal 1997 primarily as a result of our growth in revenues. As a
result, our gross margin increased to 63% of net sales in fiscal 1997 from 50%
of net sales in fiscal 1996.
Selling and Marketing Expense. Selling and marketing expense increased to
$98,000 in fiscal 1997 from $4,000 in fiscal 1996. This increase was
attributable primarily to our increased sales volume.
General and Administrative Expense. General and administrative expense
increased to $175,000 in fiscal 1997 from $88,000 in fiscal 1996. This increase
was attributable primarily to the growth of our business and an increase in
staffing.
Interest Income (Expense). Interest income (expense), net increased to
$(8,000) in fiscal 1997. This increase in interest expense was attributable
primarily to original issue discount related to a loan entered into in 1997.
Net Loss. As a result of the foregoing factors, we incurred a net loss of
$160,000 in fiscal 1997 as compared to $81,000 in fiscal 1996.
Liquidity and Capital Resources
From inception until June 1998, we financed our operations through a
combination of loans and equity investments aggregating approximately $208,000.
Since June 1998, we have financed our operations primarily through private
sales of convertible preferred stock. Through June 30, 1999, these private
equity financings totaled $61.2 million.
Net cash used in operating activities was $13.4 million for the six months
ended June 30, 1999 as compared to $609,000 for the six months ended June 30,
1998. This increase in cash used in operating activities was attributable
primarily to a $14 million increase in net loss, an increase in accounts
receivable, inventories, prepaid expenses and other assets, offset in part by
increases in accounts payable, accrued expenses, accrued compensation and
depreciation and amortization. Net cash used in operating activities was $5.0
million in fiscal 1998, as compared to $80,000 in fiscal 1997 and $3,000 in
fiscal 1996. In each of these periods our principal operating cash requirements
were to fund our net loss, offset in part by increases in accrued expenses. The
significant increase in working capital in fiscal 1998 was due primarily to
significant growth in our operations.
Net cash used in investing activities was $838,000 for the six months ended
June 30, 1999 as compared to $876,000 for the six months ended June 30, 1998.
Net cash used in investing activities was $1.2 million in fiscal 1998, as
compared to $28,000 in fiscal 1997 and $5,500 in fiscal 1996. The increase was
attributable primarily to purchases of property and equipment. In each period,
net cash used in investing activities consisted primarily of purchases of
property and equipment.
Net cash provided by financing activities was $42.6 million for the six
months ended June 30, 1999 as compared to $6.7 million for the six months ended
June 30, 1998. In the first six months of 1999, we received $43.6 million from
the issuance of convertible preferred stock. Net cash provided by financing
activities was $17.4 million in fiscal 1998, as compared to $111,000 in fiscal
1997 and $9,000 in fiscal 1996. Net cash provided by financing activities for
fiscal 1998 consisted primarily of proceeds of $17.5 million from the issuance
of convertible preferred stock. In fiscal 1997, net cash provided by financing
activities consisted
26
primarily of proceeds of $89,000 from stockholder advances and notes payable
and $25,000 in connection with the issuance of common stock. In fiscal 1996,
net cash provided by financing consisted primarily of proceeds from stockholder
advances.
As of June 30, 1999, we had $39.7 million of cash and cash equivalents. As of
that date, our principal commitments consisted of obligations outstanding under
capital leases in the amount of $2,200 and media purchase commitments of
$2,800,000. Although we currently have no material commitments for capital
expenditures, we anticipate that our business model will require us to commit
resources to promote our brand aggressively, expand our product and service
offerings, and enhance our infrastructure. Our media purchases generally
require a one to three month advance commitment, though some of these
commitments may be resaleable.
We currently anticipate that the net proceeds of this offering, together with
current cash and cash equivalents, will be sufficient to meet our anticipated
needs for working capital and capital expenditures through at least the next 12
months. We anticipate that we are likely to need additional financing to
execute our business model after that 12-month period or sooner if we need to
respond to business contingencies, such as funding additional advertising
expenditures, developing new or enhancing existing content, features or
services, enhancing our operating infrastructure, responding to competitive
pressures, or acquiring complementary businesses or technologies. If we raise
additional funds through the issuance of equity, or convertible debt
securities, the percentage ownership of our stockholders will be reduced, and
these newly-issued securities may have rights, preferences or privileges senior
to those of existing stockholders, including those acquiring shares in this
offering. We cannot be certain that additional financing will be available to
us on favorable terms when required, or at all.
Year 2000 Readiness Disclosure
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year
2000 phenomenon. For example, we are dependent on the financial institutions
involved in processing our customers' credit card payments for product orders
and on a third party that hosts our servers. We are also dependent on
telecommunications vendors to maintain our network and the United States Postal
Service and other third-party carriers to deliver orders to customers.
We have reviewed the year 2000 compliance of our internally developed
proprietary software. Since our inception, we have internally developed
substantially all of the systems for the operation of our Web site. These
systems include our online search and navigation capabilities, customer service
and transaction-processing and fulfillment functions, as well as firewall,
security, monitoring and back-up capabilities. Based upon our assessment to
date, we believe that our internally developed proprietary software is year
2000 compliant.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services of our vendors. Based
upon the results of this assessment, we will develop and implement, if
necessary, a remediation plan with respect to third-party software, third-party
vendors and computer technology and services that may fail to be year 2000
compliant. At this time, the expenses associated with this assessment and
potential remediation plan are expected to be insignificant. The failure of our
software and computer systems and of our third-party suppliers to be year 2000
compliant would harm our business.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet and NaviSite, Inc., our Web site hosting service,
to provide our services. We also depend on the year 2000 compliance of the
computer systems
27
and financial services used by consumers. A significant disruption in the
ability of consumers to reliably access the Internet or portions of it or to
use their credit cards would have an adverse effect on the demand for our
services and would harm our business.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, requiring computer software
costs associated with internal-use software to be expensed as incurred until
certain capitalization criteria are met. We adopted SOP 98-1 for the year ended
December 31, 1998. Adoption of this statement did not have a material impact on
our financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on Costs of Start-Up
Activities, requiring all costs associated with preopening, preoperating and
organization activities to be expensed as incurred. We have adopted the
statement and have expensed all amounts.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. As issued, SFAS 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999, with
earlier application encouraged. In May 1999, the FASB delayed the effective
date of SFAS 133 for one year, to fiscal years beginning after June 15, 2000.
We do not currently nor do we intend in the future to issue derivative
instruments and therefore do not expect that the adoption of SFAS 133 will have
any impact on our financial position or results of operations.
28
BUSINESS
Overview
We are a leading online retail store and information site for vitamins,
supplements and minerals, or VSM, and other natural and healthy living
products. Through our innovative combination of content and commerce, we intend
to establish MotherNature.com as the preferred destination for consumers
interested in natural and healthy living products. We currently offer
approximately 13,000 products on our site and can special order additional
products through our supplier relationships. We continue to increase our
product assortment. In addition, we provide educational and authoritative news
and information about our products and healthy living in general, which we
integrate with our product offerings in an easily accessible way. We are
building the MotherNature.com brand and increasing our customer base through an
aggressive mass-media advertising program that promotes our memorable name.
Through these marketing efforts, we are seeking to establish MotherNature.com
as a trusted advisor to our growing online community, which includes
approximately 77,000 registered members as of July 31, 1999.
Industry Background
Growth of the Internet and Electronic Commerce
The Internet has become an increasingly significant medium for communication,
information and commerce. According to International Data Corporation (IDC),
there were approximately 142 million Internet users worldwide at the end of
1998 and this number is expected to grow to approximately 398 million Internet
users by the end of 2002. The total value of services and products purchased
over the Internet grew from approximately $296 million at the end of 1995 to
approximately $50 billion at the end of 1998 according to IDC. Although we
cannot be certain of any future growth, IDC estimates that this amount will
increase to approximately $733 billion by the end of 2002. According to IDC,
worldwide business-to-consumer sales over the Internet are expected to increase
from approximately $15 billion in 1998 to approximately $116 billion by 2002.
We believe that this dramatic growth presents significant opportunities for
online retailers.
The VSM and Natural Products Market
According to Packaged Facts, a consumer products market research firm, sales
of VSM totaled approximately $8.9 billion in 1998 and are expected to grow to
approximately $16.6 billion by 2003, a compound annual growth rate of 13.3%. We
believe that several factors are driving this growth, including a rapidly
growing segment of the population that is concerned with aging and disease, a
growing interest in preventative health care, favorable consumer attitudes
toward natural products and a favorable regulatory statute, the Dietary
Supplement Health and Education Act of 1994. Additionally, public awareness of
the positive effects of vitamins and other nutritional supplements on health
has been heightened by widely publicized reports of favorable research
findings. According to data published by Packaged Facts, 56% of U.S. adults
took vitamins in 1998, up from 43% in 1993. We believe, based upon this data,
that 78% of these adults now take vitamins at least once a day.
The VSM market is a subset of the broader natural products market, which
includes product categories such as personal care products, household and other
general merchandise, perishable and non-perishable foods, organic coffees and
teas, sports nutrition, cosmetics, baby care products and pet care products.
Due to the size of this market and the absence of a dominant online natural
products retailer, we believe that additional opportunities for online sales
within the broader natural products market also exist.
Limitations of Traditional Retailers of VSM and Natural Products
We believe that traditional retailers of VSM and other natural and healthy
living products face several challenges in providing a satisfying shopping
experience for consumers, including:
29
. Lack of information and product guidance. The typical retail shopping
experience can be confusing and often lacks timely, relevant and
credible information to educate and guide the consumer to an effective
product solution. In particular, retail stores offer consumers limited
means to choose among many products or to select the appropriate product
for a given condition other than by asking store personnel who may not
be knowledgeable. Further, researching a product or health condition in
a retail store can be difficult due to the lack of easily accessible
reference materials.
. Lack of convenience and privacy. Traditional retailers have limited
store hours and locations. Traditional retailers are also unable to
provide consumers with privacy while shopping, as consumers must often
reveal personal health conditions when asking store personnel for
product advice.
. Limited product assortment. The capital and real estate intensive nature
of store-based retailers limit the product selection that can be
economically offered in each store location.
. Lack of customer information and communication. Traditional retailers
cannot easily obtain demographic information about their customers,
which prevents them from customizing product presentation and selection
and undertaking focused direct marketing activities. Traditional
retailers often have little interaction with their customers and most
are unable to establish ongoing communication with them.
As a result of the foregoing limitations, we believe there is significant
unmet demand for an alternative shopping channel that can provide consumers of
VSM and other natural and healthy living products with a broad array of
products, a wealth of news and information to help them research and select
products and a convenient and private shopping experience.
The MotherNature.com Solution
We attract and retain consumers through the following key attributes of our
site:
Educational and Authoritative Information. Our online store is designed to
inform consumers and assist them in making appropriate, educated purchase
decisions. Our users can access timely and authoritative literature on all
aspects of healthy living, including over 1,300 articles, news clips and
encyclopedia entries from the Encyclopedia of Natural Health included on our
site, as well as narratives on health conditions, natural remedies, products
and recent developments. Our site offers a wealth of internally developed and
third-party licensed content developed by physicians, nutritionists and other
health professionals. The content on our site is based on research and studies
published in prominent medical journals, such as the Journal of the American
Medical Association, the Lancet and the New England Journal of Medicine, as
well as news articles and various other books and periodicals.
Integration of Content and Commerce. Our site integrates information on
healthy living and specific health conditions with access to products, and
thereby provides comprehensive solutions to consumer concerns. Consumers can
use our content to search for and research specific products or brands or to
locate products targeted to their particular lifestyle or special interest.
Alternatively, consumers can research a specific health concern or browse the
Encyclopedia of Natural Health and select from natural solutions merchandised
through links to the content. For example, under a discussion of "depression,"
consumers are presented with a targeted selection of natural products,
including "St. John's Wort," with a "click to buy" option. The consumer also
has the option of selecting from a set of "solution baskets" which we have
created to address particular health concerns.
Convenient and Private Shopping. Our Web site is easily accessible for
shopping 24 hours a day, seven days a week. Consumers shop in the privacy of
their home or office and can comfortably research sensitive health concerns and
purchase products that they might be uncomfortable purchasing in a retail
store. Our Web site also provides a number of features which make the shopping
process more convenient. For example, we
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have simplified the reordering process by enabling customers to select their
past orders for reorder with one click. In addition, we provide each customer
with a personal shopping list of every product the customer has previously
ordered, which allows quick and easy selection of specific items for reorder.
We also offer a personal shopper service in which a customer service
representative finds desired products and information for those customers that
complete an online request form.
Broad Expandable Product Assortment. Our product selection is substantially
larger than that offered by store-based retailers. We offer approximately
13,000 VSM and other natural and healthy living products on our site, and
provide customers with the ability to order additional products through our
suppliers. Our online store is easily expandable to include additional natural
and healthy living products and related services we may add in the future. Our
current product offerings include such categories as: Vitamins, Minerals,
Supplements, Herbs, Homeopathy, Teas, Bath & Body, Aromatherapy, Pet Products,
Books and General Merchandise. We organize our broad product assortment by
allowing consumers to search by brand, health concern, lifestyle or special
interest or product category.
Customer Information and Ongoing Communication. We use e-mail to provide
order status and shipping confirmation, to inform customers of news stories
which relate to their particular past purchases and to respond to customer
service inquiries. In addition, we use e-mail to send our customers a bi-weekly
newsletter which is also made available on our Web site. Through the member
registration process we can determine the demographics of our customer base and
can use this information to customize our Web site and product and service
offerings, thereby enabling us to better address certain demographic segments
of our customer base.
The MotherNature.com solution also includes quality customer service, rapid
product delivery and e-mail order confirmation. Through our warehouse and
distribution center, we can manage inventory levels based on customer demand
and indicate on our site which products are in stock. In addition, we are
developing the MotherNature.com community to provide consumers with a forum for
sharing natural and healthy living product experiences, ideas and advice.
Our Strategy
We intend to establish MotherNature.com as the leading online retailer and
information site for VSM and other natural and healthy living products. Our
strategy for growing our business includes the following:
Promote the MotherNature.com Brand. We intend to promote our highly memorable
brand name through the aggressive use of traditional offline advertising, the
promotion of our private label products and the selective use of online
advertising, direct marketing and public relations. In particular, we believe
our offline advertising campaign has been and will continue to be successful in
rapidly building awareness of our brand in the geographic markets we target. We
intend to broaden this advertising campaign from radio, newspaper, magazine and
outdoor media to include a national television campaign, which we expect to
commence in the Fall of 1999.
Establish MotherNature.com as the Trusted Authority for VSM and Other Natural
and Healthy Living Products. Through our marketing efforts, we intend to
establish our Web site as a trusted consumer resource by providing informative
and authoritative content that will differentiate our Web site from those of
our competitors. We believe the content on our site, including the Encyclopedia
of Natural Health, the numerous articles and news clips from leading sources
and the authoritative contributions of our staff of health professionals,
provides consumers with trustworthy information to conduct thorough research on
hundreds of health conditions and VSM and other natural and healthy living
products. We have established a Medical Advisory Board comprised of health
professionals, including an internist, an exercise physiologist, a
cardiologist, a dermatologist, a biochemist and a nutritionist, all of whom are
either medical doctors or Ph.Ds. Members of our Medical Advisory Board are
responsible for making individual content contributions and for providing our
editorial staff with guidance on developing and reviewing content as requested.
We intend to
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further develop our community and establish trust with consumers by providing
question and answer sessions with members of our Medical Advisory Board.
Promote Repeat and Complementary Purchases. We intend to capitalize on the
inherent need for regular replenishment of VSM products by promoting repeat
sales through features including automatic reorder, personalized nutritional
supplement programs, customer profiling, loyalty programs and targeted news
feeds. We also plan to introduce impulse items at checkout, first with standard
products and later with highly targeted items based on the contents of the
consumer's shopping basket. As we offer a broader range of natural products, we
intend to provide consumers with natural alternatives to frequently used
products such as household detergents, pet foods and cosmetics.
Develop Business Incentive Programs. We intend to enlist and provide
financial incentives for primary care physicians, alternative health providers,
corporate health plans, HMOs and physician networks, wellness centers and
health clubs to generate additional revenue opportunities through the promotion
of VSM and other natural and healthy living product purchases and referrals to
our Web site. We believe that our relationships with these businesses and
individuals will increase consumer traffic to our site as well as provide
additional sources of content and enhance the credibility of our site.
Provide Quality Customer Service. We intend to provide our customers with a
high level of service, primarily through our in-house distribution center. We
are increasing inventory levels of popular products and are moving to a new
25,000 square foot fulfillment facility, located adjacent to a U.S. Postal
Service Priority Mail processing center, that will expand our warehousing and
rapid distribution capacity. We believe that our control over our distribution
center will enable us to fill customer orders more promptly and maintain higher
customer satisfaction levels. We also endeavor to provide quality customer
service through e-mail communications and our responsive call center.
Expand Presence in International Markets. We believe that there are
significant opportunities in the VSM and other natural and healthy living
products market internationally, particularly in Asia, the United Kingdom and
Canada. As an online retailer, we believe that we will be able to effectively
penetrate and serve these international markets. We intend to expand our
international sales by translating our Web site into several foreign languages
and advertising in those strategically selected areas where we believe a
substantial market may exist.
Our Site
Shopping Our Store
From the MotherNature.com home page, consumers can shop in four ways:
. By Product Department. Consumers can search for products among the 13
product departments on our Web site, such as Vitamins, Supplements,
Minerals, Herbs and Pet Products.
. By Lifestyle and Special Interest. Consumers can search for products
among five main categories: Personal & Family Health, Anti-Aging, Sports
& Fitness, Nutrition & Weight Control and Ayurvedic Medicine (an Indian
healing system). These categories include subcategories such as women's
health, men's health, strength training and nutrition, bone and joint
health and mind and memory.
. By "What Ails You?" Consumers can search for products related to over
100 health concerns included in the Concerns From A-Z category. In
addition, this section of the site includes 133 solution baskets, each
of which contains multiple products for use in addressing a particular
health concern.
. By "Brands From A-Z." Consumers can search for their favorite brand and
can browse the various categories of products which are provided for
each listed brand.
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We also alert consumers to special values, new products, product promotions
and new merchandise categories. For example, consumers can easily locate
product specials on our "Specials" page and new product offerings on our
"What's New" page. Also, our home page features our best-selling products and
promotes various "Featured Product Lines."
Our Web site offers several personalized services. We provide our members
with a free bi-weekly e-mail newsletter containing timely news stories and
articles, as well as product specials which are designed to encourage customer
purchases. In addition, we provide a free clipping service through which
customers can choose to receive direct e-mail news clippings on over 40 health
topics.
Our site offers consumers an easy and convenient shopping experience.
Consumers simply click on a button to add products to their virtual shopping
baskets. As they browse, consumers can add and subtract products from their
shopping baskets prior to making a final purchase decision. We deduct
promotional dollars from the purchase price of products, eliminating the need
to cut coupons. Customers who shop using our personal shopper feature are sent
an e-mail when their basket has been filled by one of our customer service
representatives, leaving them one click away from purchasing. To submit orders,
customers click on the "Proceed to Check Out" button and are prompted to supply
shipping and credit card details online, or by e-mail, phone or facsimile. A
variety of shipping options are offered and large orders receive shipping
discounts. Customers are provided with automated e-mail order verification,
back-order processing and shipping confirmation. Upon their first order, every
MotherNature.com customer is assigned a password-accessible personal account
number. This "Your Account" function allows customers to easily view current
order status and previous order contents and to select past orders for one-
click reorders.
Our Content
Our site offers a wealth of authoritative and educational content. We believe
that our integration of content and commerce results in a more rewarding
shopping experience for consumers. Our site includes over 1,300 articles, news
clips and encyclopedia entries from the Encyclopedia of Natural Health, as well
as narratives on health conditions, natural remedies, products and recent
developments, all of which are designed to provide credible information and
assist consumers with their purchase decisions. A key component of our
merchandising strategy is our ability to link relevant product offerings
throughout the text of the various articles, encyclopedia entries and other
narratives displayed on our Web site. This strategy enables us to more
effectively market our products, since consumers are able to research a
specific health concern and at the same time access the natural product
solutions mentioned within the content. Our "In the News" section alerts
consumers to timely news stories regarding VSM and other healthy living issues,
while enabling us to highlight applicable product offerings.
The Encyclopedia of Natural Health is based on content licensed from
HealthNotes Online and incorporates information gathered from over 500
authoritative scientific and medical journals, such as The Journal of the
American Medical Association, the Lancet and the New England Journal of
Medicine. The Encyclopedia home page displays six main categories of
encyclopedia entries, thereby enabling consumers to easily search its contents.
For example, under the "Health Concerns" category, the entries address over 140
health concerns and helpful dietary supplements. Under the "Herbs & Botanicals"
category, a consumer can find reviews covering 150 herbs, which include
information on where the herbs are grown and their historical or traditional
uses.
In addition, our site includes internally developed content, such as our
"Consumer Guides", bi-weekly newsletter and a section devoted to recent news
stories, as well as content licensed from third parties, such as the American
Botanical Council. Members of our Medical Advisory Board write articles,
columns and narratives for inclusion on our site, review and critique selected
portions of our content, provide advice and guidance to our editorial staff and
assist in developing our solution baskets. Medical Advisory Board members also
assist us in preparing articles on new product or market developments,
including responses to current media publicity regarding VSM products.
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Our Community
We are building an active community dedicated to educating consumers about
VSM, healthy living and natural products. We are also developing interactive
tools for the site in order to provide a fulfilling shopping experience and to
build a sense of community among our customers. We currently provide a news
clipping service and several forums, including forums on herbs, weight control,
natural pet care and women's health, which are monitored by qualified
professionals and which enable consumers to ask and respond to each other's
questions. Future plans include the introduction of additional forums, medical
advice sessions hosted by members of our Medical Advisory Board, health quizzes
and customer testimonials.
Marketing and Site Promotion
Our marketing strategy is designed to strengthen the MotherNature.com brand
name, increase traffic to the MotherNature.com store, build strong customer
loyalty, maximize repeat purchases and develop incremental revenue
opportunities. We believe our offline advertising campaign, launched in March
1999, has proven to be especially successful in achieving these objectives.
Therefore, we intend to continue to promote the MotherNature.com brand through
aggressive offline advertising as well as through online advertising, business-
to-business programs, direct marketing and public relations. Our marketing
efforts are targeted at active, health- conscious adults and consist of:
Offline advertising. We are committing significant resources to building our
brand name by using print, radio and outdoor advertising campaigns. Our offline
campaign commenced in early March 1999 and was primarily targeted at the
metropolitan areas of Boston, New York City, San Francisco and Seattle. In May
and June, the campaign was expanded to include several additional cities,
including Los Angeles, Detroit, Dallas, Denver, Chicago and Washington D.C. In
connection with this campaign, we have retained Ogilvy & Mather Worldwide as
our creative firm. The campaign is comprised of radio advertisements, print
advertisements in newspapers, including The New York Times, The Boston Globe
and The San Francisco Chronicle, regional editions of national magazines, such
as People Magazine, and outdoor media such as billboards and buses. Targeted
ads have also been placed in natural products and health-related magazines and
relevant sections of national newspapers. The radio advertisements feature
recognized and celebrity voices, including the voice of actress Blythe Danner
as "Mother Nature." In addition, we are planning the introduction of a major
national brand-building campaign on television which is expected to commence in
the Fall of 1999.
Other advertising. To a lesser extent, we are using online advertising,
direct marketing and public relations in our marketing strategy. Our online
strategy involves selective advertising on the Web sites of major Internet
content and service providers and targeted health-related Web sites. We have
established hypertext links on sites including Yahoo! and America Online
Shopping Channels. In addition, we have established an affiliates program which
allows third parties to receive commissions for sales generated by customers
that hyperlink to MotherNature.com from the third-party site.
We will continue to refine our direct marketing campaign by tailoring
offerings to the demographics of our targeted audience. Currently, our direct
marketing activities consist of our bi-weekly newsletter, e-mail and regular
mail postcards, and special inducements.
We have engaged a public relations firm to generate media interest in our
site through editorial coverage in business, consumer and industry trade
publications. Our first public relations event, "Stress Relief for a Taxing
Day," was held on April 15, 1999 in Boston, New York, San Francisco and
Seattle, where we handed out samples of our private label Kava Kava, a natural
stress reliever, to persons mailing their income tax returns.
Business incentive programs. We believe we can increase traffic to our site
and acquire loyal customers through the establishment of business incentive
programs. We intend to enlist and provide financial incentives for primary care
physicians, alternative health providers, corporate health plans, HMOs and
physician networks,
34
wellness centers and health clubs to generate additional revenue opportunities
through the promotion of VSM and other natural and healthy living product
purchases and referrals to our Web site. We believe that our relationships with
these businesses and individuals will increase consumer traffic to our site, as
well as provide additional sources of content and enhance the credibility of
our site.
Our Products
Products we offer. The following is a representative sampling of the products
offered on our Web site:
Vitamins Supplements Minerals Herbs Bath & Body Teas
- -------- ----------- -------- ----- ----------- ----
Beta Carotene Acidophilus Boron Alfalfa Acne Products Aloe
Bioflavonoids Adrenal Supplements Calcium Anise Seed After Shave Anise
Biotin Antioxidants Chromium Bayberry Aloe Vera Gels Antioxidant
Children's Vitamins Bee Pollen Copper Calendula Bar Soaps Assorted Herbal
Choline Borage Dolomite Echinacea Body Lotions Black Currant
Folic Acid Bran Germanium Elderberry Cosmetics Chai
Inositol Brewer's Yeast Iron Ginkgo Biloba Deodorants Chamomile
Multivitamins Chlorella Magnesium Ginseng Facial Cleanser Dandelion
Niacin DHEA Silica Kava Root Shaving Cream Ginseng
Paba CLA Potassium Goldenseal Root Foot Care Products Dong Quai
Pantothenic Acid Cod Liver Oil Selenium Hyssop Massage Oil Fennel
Pyridoxine Evening Primrose Oil Zinc Saw Palmetto Sun Care Green
Rutin Glucosamine St. John's Wort Melatonin
Vitamins A-E Lecithin
Homeopathy Aromatherapy Books Pets General Merchandise
- ---------- ------------ ----- ---- -------------------
Belladonna All Spice Oil Allergies Catnip Air Fresheners
Cell Salts Camphor Oil Arthritis Grooming Products Candy/Gum/Mints
Fever Remedies Cedar Oil Ayurvedic Medicine Herbal Collars Coffee
Headache & Migraine Clove Oil Cooking Pet Books Diapers
Remedies Grapefruit Oil Depression Pet Foods Feminine Care
Heartburn Remedies Hyssop Oil Gardening Pet Supplements Household Cleaners
Nux Vomica Jasmine Oil Herbs Toys Juicers & Pulp Extractors
Oscillococcinum Lavender Oil Homeopathy Laundry Products
Sabina Orange Oil Juices Paper Products
Sepia Patchouli Oil Sports Nutrition Snacks
Rosemary Oil Supplements Vitamin Accessories
& Pill Crushers
Water Filters
Product sources. We purchase products from several distributors and
manufacturers. We carry inventories of all of our private label products and
selected, higher-turnover branded items and arrange rapid fulfillment from
major distributors and manufacturers for the remainder of our product
offerings. We market and distribute merchandise from national brands such as
Natrol, TwinLab and NatureMade, and also carry approximately 300 products under
our own private label brand, MotherNature.com, which is manufactured primarily
by Reliance Vitamin Company. To the extent available, our private label
products are displayed first on any search list. In the six months ended June
30, 1999, no one national brand accounted for more than 7% of sales. During the
same period, sales of MotherNature.com branded products accounted for 43% of
sales.
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Product and service offering expansion. Consistent with our objective of
becoming the preferred destination for consumers interested in natural and
healthy living products, we intend to expand our product and service offerings
to address the broader natural products market. We recently added a pet
supplies and a general merchandise category of products to our Web site. In
addition, we recently began offering a private label line of organic coffees on
our site. We intend to expand our existing product and service offerings in the
General Merchandise and Bath & Body categories by adding the following:
recycled cards and stationery; spa and travel; baby care; music and
natural/organic clothing. We also intend to expand the products offered under
our private label to include these and other categories.
Customer Support
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. Our customer service representatives
are currently available from 9 a.m. to 9 p.m. Eastern time, Monday through
Friday, to provide customer assistance by e-mail or telephone. Our customer
service representatives handle questions about orders and how to navigate our
Web site and assist customers in finding desired products. In addition, we
provide each customer with automated e-mail order verification, back-order
processing and shipping confirmation. We provide pre- and post-sales support by
e-mail, facsimile and toll-free telephone service. Upon ordering for the first
time, each customer receives a password-accessible personal account which
allows the customer to view current order status and prior order contents and
to select past orders for one-click reorders.
Order Fulfillment
We maintain a fulfillment center in Southampton, Pennsylvania which operates
five days per week. All product receiving, warehousing and pick, pack and ship
operations are housed in this facility. We currently stock approximately 8,000
SKUs, including approximately 300 private label products, and have plans to
increase the number of items in-stock over time. All items that are in-stock
are noted as being "in-stock" on our Web site and are available for same day
shipment if the order is received prior to 3:00 p.m. EST. Orders for products
not in our warehouse are usually available for shipment within 24 to 72 hours,
and these items are ordered from suppliers at least once per day. Customers are
not charged for their orders until the ordered product is shipped. Orders are
shipped to locations worldwide by major carriers including the U.S. Postal
Service, UPS, Federal Express and DHL.
We are relocating our fulfillment center to a 25,000-square-foot facility in
Springfield, Massachusetts, which we anticipate to be completely operational by
the end of 1999, at which point we anticipate closing the Southampton facility.
Until our Springfield facility becomes fully operational, we intend to maintain
fulfillment operations in both centers. Since the Springfield fulfillment
center is located across the street from a U.S. Postal Service Priority Mail
processing center, we intend to ship most orders by Priority Mail, thereby
reducing our current shipping costs.
Order processing, inventory management, shipping and billing are primarily
handled by our proprietary system. We are in the process of converting from our
proprietary system to a system licensed from a third-party vendor, Yantra
Corporation, located in Acton, Massachusetts. When this conversion is
completed, the Yantra system, plus other third-party software modules, is
expected to handle order-to-fulfillment processing, including purchase order,
receiving, inventory management, shipping and billing and are expected to be
fully integrated with our front end.
Technology and Systems
We have implemented a broad array of Web site management, search engine,
customer support, order-processing and fulfillment systems using a combination
of commercially available, licensed technologies and selected proprietary
technologies. The front end of our Web site is built on industry standard
technologies,
36
including Compaq multiprocessor servers, the Microsoft Windows NT operating
system, Microsoft Internet Information Server and a robust Oracle database.
These technologies are integrated using a variety of proprietary scripts, the
majority of which are written in HTML, Javascript and Microsoft Active Server
Pages. These scripts handle user interface, product search, ordering, order
tracking and customer communications.
The current Web site front-end architecture can be scaled to handle increases
in traffic and usage. Further, in response to capacity concerns and site
development needs, we recently increased from one to four the number of servers
that run our Web site and are in the process of configuring these servers in a
manner to provide redundant capacity. We intend to continue to invest in
technologies that will enable us to handle growth in traffic and advancements
in site infrastructure. In the near future, we plan to implement several new
systems, including tools for providing enhanced personalization of the front
end in response to consumer demographics and shopping preferences.
The continued, uninterrupted operation of our Web site and transaction-
processing systems is essential to our business, and we employ a group of
systems administrators to monitor and manage our Web site, network operations
and transaction-processing systems to ensure their continued operation and
reliability. In addition, the system includes redundant hardware on mission
critical components and can survive a variety of failures with minimal
downtime.
We subcontract the hosting of our servers to NaviSite, Inc., an Internet data
center specialist. NaviSite provides Internet connections to multiple Internet
access points, a secure physical environment, climate control, redundant power
and 24-hour-a-day, 7-day-a-week monitoring services. NaviSite currently hosts
several of our servers in its Andover, Massachusetts data center. NaviSite has
adequate capacity for expansion in its Massachusetts facility to support our
growth. NaviSite currently provides us with a dedicated 100 Megabit per second
connection to the Internet for each of our four servers, which can be upgraded
to 400 Megabit per second or beyond. NaviSite has multiple connections to the
Internet through separate connections to various Internet service providers,
and these connections can be expanded as necessary to handle the traffic and
demands of our site. We plan to expand the hosting of our services into
additional facilities to provide additional support for our site in the event
of a disaster at one facility.
Competition
The electronic commerce industry is new, rapidly evolving and intensely
competitive, and we expect competition to intensify in the future. Barriers to
entry are minimal and current and new competitors can launch sites at a
relatively low cost. In addition, the VSM and natural and healthy living
products market is very competitive and highly fragmented, with no clear
dominant leader and increasing public and commercial attention.
We believe that the principal competitive factors in our market are:
. brand recognition and trust-worthiness;
. ability to attract and retain customers;
. breadth of product selection;
. product pricing;
. availability of educational and authoritative information; and
. quality and responsiveness of customer service.
We believe that we compete favorably on these factors. However, we will have no
control over how successful our competitors are in addressing these factors. In
addition, with little difficulty, our online competitors can duplicate many of
the products, services or content offered on our site.
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Our competitors can be divided into several groups including:
. traditional VSM and natural products retailers, including General
Nutrition Centers and Vitamin Shoppe;
. the online retail initiatives of several traditional VSM and natural
product retailers, including VitaminShoppe.com and Vitamins.com;
. online retailers of pharmaceutical products that also carry VSM and
natural products retailers, including Drugstore.com, PlanetRx.com and
CVS.com;
. independent online retailers specializing in VSM, including Greentree
Nutrition, Inc., HealthShop.com, eNutrition, allherb.com, vitamins.net
and Vitanet;
. mail-order and catalog retailers of VSM and natural products, including
NBTY, Amrion, Rexall Sundown and Vitamin Shoppe, some of which have
already developed online retail outlets; and
. direct sales organizations, retail drugstore chains, health and natural
food store merchants, mass market retail chains and various
manufacturers of natural products.
Many of our current and potential competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we have.
Additionally, industry consolidation may increase competition. Recently,
Drugstore.com announced the formation of a strategic relationship with Rite Aid
and General Nutrition Centers. In addition, an online retailer may be acquired
by, receive investments from, or enter into other commercial relationships
with, larger, well-established and well-financed companies as use of the
Internet and other electronic services increases. Competitors have and may
continue to adopt aggressive pricing or inventory availability policies and
devote substantially more resources to Web site and systems development than we
do. Increased competition may result in reduced operating margins, loss of
market share and a diminished brand franchise.
Regulatory Environment
Government regulation of our products. The manufacturing, processing,
formulating, packaging, labeling and advertising of the products we sell are or
may be subject to regulation by one or more federal agencies, including the
FDA, the FTC, the United States Department of Agriculture and the Environmental
Protection Agency. These activities also may be regulated by various agencies
of the states, localities and foreign countries in which consumers reside.
The FDA, in particular, regulates the formulation, manufacture, labeling and
distribution of foods, including dietary supplements, cosmetics and over-the-
counter or homeopathic drugs. Under the Federal Food, Drug, and Cosmetic Act,
the FFDC Act, the FDA may undertake enforcement actions against companies
marketing unapproved drugs, or "adulterated" or "misbranded" products. The
remedies available to the FDA include: criminal prosecution; an injunction to
stop the sale of a company's products; seizure of products; adverse publicity;
and "voluntary" recalls and labeling changes.
FDA regulations require that certain informational labeling be presented in a
prescribed manner on all foods, drugs, dietary supplements and cosmetics.
Specifically, the FFDC Act requires that food, including dietary supplements,
drugs and cosmetics, not be "misbranded." A product may be deemed an unapproved
drug and "misbranded" if it bears improper claims or improper labeling. The FDA
has indicated that promotional statements made about dietary supplements on a
company's Web site may constitute "labeling" for purposes of compliance with
the provisions of the FFDC Act. A manufacturer or distributor of dietary
supplements must notify the FDA when it markets a product with labeling claims
that the product has an effect on the structure or function of the body.
Noncompliance with the FFDC Act, and recently enacted amendments to the FFDC
Act discussed below, could result in enforcement action by the FDA.
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The FFDC Act has been amended several times with respect to dietary
supplements, most recently by the Nutrition Labeling and Education Act of 1990,
NLEA and the Dietary Supplement Health and Education Act of 1994, DSHEA. The
DSHEA created a new statutory framework governing the definition, regulation
and labeling of dietary supplements. With respect to definition, the DSHEA
created a new class of dietary supplements, consisting of vitamins, minerals,
herbs, amino acids and other dietary substances for human use to supplement the
diet, as well as concentrates, metabolites, extracts or combinations of such
dietary ingredients. Generally, under the DSHEA, dietary ingredients that were
on the market before October 15, 1994 may be sold without FDA pre-approval and
without notifying the FDA. In contrast, a new dietary ingredient, i.e., one not
on the market before October 15, 1994, requires proof that it has been used as
an article of food without being chemically altered or evidence of a history of
use or other evidence of safety establishing that it is reasonably expected to
be safe. Retailers, in addition to dietary supplement manufacturers, are
responsible for ensuring that the products they market for sale comply with
these regulations. Noncompliance could result in enforcement action by the FDA,
an injunction prohibiting the sale of products deemed to be noncompliant, the
seizure of such products and criminal prosecution.
With respect to labeling, the DSHEA amends, for dietary supplements, the NLEA
by providing that "statements of nutritional support," also referred to as
"structure/function claims," may be used in dietary supplement labeling without
FDA pre-approval, provided certain requirements are met. These statements may
describe how particular dietary ingredients affect the structure or function of
the body, or the mechanism of action by which a dietary ingredient may affect
body structure or function, but may not state a drug claim, i.e., a claim that
a dietary supplement will diagnose, mitigate, treat, cure or prevent a disease.
A company making a "statement of nutritional support" must possess
substantiating evidence for the statement, disclose on the label that the FDA
has not reviewed the statement and that the product is not intended for use for
a disease and notify the FDA of the statement within 30 days after its initial
use. We cannot assure you that the statements of nutritional support we include
on our Web site, and on the labels or labeling of the products we sell, will
not be determined by the FDA to be drug claims rather than acceptable
"statements of nutritional support." Such a determination could render the
product that is the subject of the statement an unapproved drug or a
"misbranded" product, potentially subjecting us to enforcement action by the
FDA, and could require removal of the objectionable "drug claim," interfering
with our continued marketing of that product.
In addition, the DSHEA allows the dissemination of "third party literature"
in connection with the sale of dietary supplements to consumers at retail if
the publication meets statutory requirements. Under the DSHEA, "third party
literature" may be distributed if, among other things, it is not false or
misleading, no particular manufacturer or brand of dietary supplement is
promoted, a balanced view of available scientific information on the subject
matter is presented and there is physical separation from dietary supplements
in stores. The extent to which this provision may be used by online retailers
is not yet clear, and we cannot assure you that all pieces of "third party
literature" that may be disseminated in connection with the products we offer
for sale will be determined by the FDA to satisfy each of these requirements.
Any such failure could render the involved product an unapproved drug or a
"misbranded" product, potentially subjecting us to enforcement action by the
FDA, and could require the removal of the noncompliant literature from our Web
site, interfering with our continued marketing of that product.
Given the fact that the DSHEA was enacted only five years ago, the FDA's
policy and enforcement positions on certain aspects of the new law are still
evolving. Moreover, ongoing and future litigation between dietary supplement
companies and the FDA will likely further refine the legal interpretations of
the DSHEA. As a result, the regulatory status of certain types of dietary
supplement products, as well as the nature and extent of permissible claims
will remain unclear for the foreseeable future. Two areas in particular that
pose potential regulatory risk are the limits on claims implying some benefit
or relationship with a disease or related condition and the application of the
physical separation requirement for "third party literature" as applied to
Internet sales.
The FDA currently proposes to regulate the sale of non-prescription products
containing ephedra, a natural product that contains a small percentage of the
ephedrine alkaloids that are used in some prescription and over-
39
the-counter stimulants and antihistimines. Less than 1% of our 1998 revenues
were derived from products that contain ephedra. We do not believe that a
complete loss of sales of these products or further restrictions in
jurisdictions in which these products may be sold would materially impact our
business.
In addition to the regulatory scheme under the FFDC Act, the advertising and
promotion of dietary supplements, foods, over-the-counter drugs and cosmetics
is subject to scrutiny by the FTC. The Federal Trade Commission Act prohibits
"unfair or deceptive" advertising or marketing practices, and the FTC has
pursued numerous food and dietary supplement manufacturers and retailers for
deceptive advertising or failure to substantiate promotional claims, including,
in many instances, claims made via the Internet. The FTC has the power to seek
administrative or judicial relief prohibiting a wide variety of claims, to
enjoin future advertising, to seek redress or restitution payments and to seek
a consent order and seek monetary penalties for the violation of a consent
order. In general, existing laws and regulations apply fully to transactions
and other activity on the Internet. The FTC is in the process of reviewing its
policies regarding the applicability of its rules and its consumer protection
guides to the Internet and other electronic media. The FTC has already
undertaken a new monitoring and enforcement initiative, "Operation Cure-All,"
targeting allegedly bogus health claims for products and treatments offered for
sale on the Internet.
Many states impose their own labeling or safety requirements that differ from
or add to existing federal requirements. For example, the State of California
and the National Resources Defense Council filed lawsuits against a large
number of manufacturers of dietary supplements containing calcium, claiming
that naturally-occurring lead levels in these supplements exceed acceptable
levels under California law. Although this lawsuit has since been settled by
the parties involved, we cannot assure you that we will not be the subject of
future claims asserted by the State of California or private parties or that
any such claim might not have a material adverse effect on our reputation,
results of operations and business. Also, there can be no assurance that other
states will not enact legislation similar to that enacted by the State of
California or that such legislation will not extend to any of the other
products that we offer for sale.
In addition, states enforce their own advertising or unfair and deceptive
trade practices statutes, and the vast majority authorize private rights of
action. For example, many state and federal agencies, including state attorneys
general, also have adopted Internet policies and have established dedicated
units or task forces for investigating possible violations of law on the
Internet.
State medical, pharmacy or dietician licensing bodies may also have
regulations or policies that could interfere with our ability to market our
products or services. International regulatory or customs authorities may also
limit our ability to market our products and services to consumers outside the
United States. Additional federal, state, local or international laws or
regulations may also affect our ability to market certain products or services,
such as "organic" foods, insect repellents, pet foods and other items.
We cannot predict the nature of any future laws, regulations, interpretations
or applications, nor can we determine what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on
our business in the future. Although the regulation of dietary supplements is
less restrictive than that of drugs and food additives, we cannot assure you
that the current statutory scheme and regulations applicable to dietary
supplements will remain less restrictive. Further, we cannot assure you that,
under existing laws and regulations, or if more stringent statutes are enacted,
regulations are promulgated or enforcement policies are adopted, we are or will
be in compliance with these existing or new statutes, regulations or
enforcement policies without incurring material expenses or adjusting our
business strategy. Any laws, regulations, enforcement policies, interpretations
or applications applicable to our business could require the reformulation of
certain products to meet new standards, the recall or discontinuance of certain
products not capable of reformulation, additional record keeping, expanded
documentation of the properties of certain products, expanded or different
labeling or scientific substantiation.
Government regulation of the Internet. In general, existing laws and
regulations apply to transactions and other activity on the Internet; however,
the precise applicability of these laws and regulations to the Internet is
40
sometimes uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and, as a result, do not contemplate or address the
unique issues of the Internet or electronic commerce. Nevertheless, numerous
federal and state government agencies have already demonstrated significant
activity in promoting consumer protection and enforcing other regulatory and
disclosure statutes on the Internet. Additionally, due to the increasing use of
the Internet as a medium for commerce and communication, it is possible that
new laws and regulations may be enacted with respect to the Internet and
electronic commerce covering issues such as user privacy, freedom of
expression, advertising, pricing, content and quality of products and services,
taxation, intellectual property rights and information security. The adoption
of such laws or regulations and the applicability of existing laws and
regulations to the Internet may adversely impact our ability to conduct our
business and the growth of Internet use, thereby negatively affecting our
business, results of operations and financial condition.
We have adopted a privacy policy that sets forth our policies regarding our
use of personal user information and have posted this policy on our site. It is
possible, however, that federal or state legislation may be enacted governing
user privacy, use of personal user information and privacy policy requirements.
In fact, several states have recently proposed legislation that would limit the
uses of personal user information gathered online and require the establishment
of privacy policies. While we have implemented programs designed to enhance the
protection of the privacy of our users, including children, we cannot assure
you that such programs will conform with any regulations that may be
established. We may become subject to such an investigation, or the FTC's
regulatory and enforcement efforts may adversely affect the ability to collect
demographic and personal information from users, which could have an adverse
effect on our ability to provide highly targeted opportunities for advertisers
and e-commerce marketers. Any of these developments could harm our business.
It is also possible that "cookies" may become subject to laws limiting or
prohibiting their use. The term "cookies" refers to information keyed to a
specific server, file pathway or directory location that is stored on a user's
hard drive, possibly without the user's knowledge, which is used to track
demographic information and to target advertising. Certain currently available
Internet browsers allow users to modify their browser settings to remove
cookies at any time or prevent cookies from being stored on their hard drives.
In addition, a number of Internet commentators, advocates and governmental
bodies in the United States and other countries have urged the passage of laws
limiting or abolishing the use of cookies. Limitations on or elimination of the
use of cookies could restrict the effectiveness of our targeting of
advertisements, which could have a material adverse effect on our ability to
generate advertising revenue.
Planned features of our Web site include the retention of personal
information about our users which we obtain with their consent. We have a
stringent privacy policy covering this information. However, if third parties
were able to penetrate our network security and gain access to, or otherwise
misappropriate, our users' personal information, we could be subject to
liability. Such liability could include claims for misuses of personal
information, such as for unauthorized marketing purposes or unauthorized use of
credit cards. These claims could result in litigation, our involvement in
which, regardless of the outcome, could require us to expend significant
financial resources. Moreover, to the extent any of the data constitute or are
deemed to constitute patient health records, a breach of privacy could violate
federal law.
The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. Under the European Union directive,
European Union citizens are guaranteed certain rights, including the right of
access to their data, the right to know where the data originated, the right to
have inaccurate data rectified, the right to recourse in the event of unlawful
processing and the right to withhold permission to use their data for direct
marketing.
The European Union directive could, among other things, affect U.S. companies
that collect information over the Internet from individuals in European Union
member countries, and may impose restrictions that are more stringent than
current Internet privacy standards in the United States. In particular,
companies with offices located in European Union countries will not be allowed
to send personal information to countries that do not maintain adequate
standards of privacy. The European Union directive does not, however, define
what
41
standards of privacy are adequate, and efforts by the U.S. government to
negotiate "safe harbors" principles defining how U.S. companies can comply with
the E.U. directive have not yet culminated in an agreement. As a result, we
cannot assure you that the European Union directive will not adversely affect
the activities of entities such as our company that engage in data collection
from users in European Union member countries.
A number of legislative proposals have been made at the federal, state and
local level, and by foreign governments, that would impose additional taxes on
the sale of goods and services over the Internet, and certain states have taken
measures to tax Internet-related activities. Although Congress recently placed
a three-year moratorium on new state and local taxes on Internet access or on
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium. Further, once this moratorium is
lifted, some type of federal and/or state taxes may be imposed upon Internet
commerce. Such legislation or other attempts at regulating commerce over the
Internet may substantially impair the growth of commerce on the Internet and,
as a result, adversely affect our opportunity to derive financial benefit from
such activities.
Intellectual Property
We regard the protection of our copyrights, service marks, trademarks, trade
dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws,
license agreements and contractual restrictions to establish and protect our
proprietary rights in our site architecture and technology, products, content
and services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors in order to limit disclosure of
our proprietary information and to protect our ownership interest in our site
architecture and technology. We cannot assure you that these contractual
arrangements or the other steps taken by us to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology or
deter independent third-party development of similar technologies. Moreover,
effective trademark, service mark, copyright and trade secret protection may
not be available in every country in which our services are made available
online.
We pursue the registration of our trademarks and service marks in the U.S.
and internationally; however, we cannot assure you that we will be successful
in obtaining the registration of our marks. We have applied for trademarks or
service marks on the following terms and images: "MotherNature.com" combined
with the MotherNature.com logo displayed on our Web site and other materials,
the MotherNature.com logo, "Go Ask Mother@" and "Your Healthy Living
Headquarters." We also have rights to the domain names "MotherNature.com,"
"naturalmarkets.com" and "naturalmarket.com."
We rely on content that we license from third parties, including our
Encyclopedia of Natural Health, which is licensed from HealthNotes Online, and
portions of our Web site that have been developed under license agreements with
third-party contractors. We cannot assure you that these third-party content
licenses and contractor arrangements will continue to be available to us on
commercially reasonable terms. Moreover, the loss of such content licenses
could require us to develop similar content internally or could require us to
obtain content that is of lower quality or at a higher cost, and thereby harm
our business.
We have licensed in the past, and expect that we may license in the future,
certain of our proprietary rights, such as trademarks or copyrighted material,
to third parties. While we attempt to ensure that the quality of the
MotherNature.com brand is maintained by such licensees, we cannot assure you
that such licensees will not take actions that might materially adversely
affect the value of our proprietary rights or reputation, which could harm our
business.
Employees
As of June 30, 1999, we had 112 employees. We also employ a limited number of
independent contractors and temporary employees on a periodic basis. None of
our employees is represented by a labor union, and we consider our employee
relations to be good.
42
Properties
We currently lease approximately 10,000 square feet of office space in
Concord, Massachusetts, which houses our corporate headquarters. We also lease
approximately 6,000 square feet of mixed-use facilities in Southampton,
Pennsylvania, which houses our customer support and fulfillment operations. In
connection with relocating our customer support and fulfillment operations from
Pennsylvania to Massachusetts, we have signed a lease for approximately 25,000
square feet of mixed-use space in Springfield, Massachusetts. We currently
conduct limited operations in this space and anticipate that the space will be
fully operational by the end of 1999. Additionally, we lease approximately
5,000 square feet of office space in Acton, Massachusetts which we use for
customer support and administrative functions. We believe that these facilities
are adequate for our current operations and that additional leased space can be
obtained as needed on commercially reasonable terms.
Legal Proceedings
On June 30, 1999, a civil complaint was filed as Ross A. Love v.
MotherNature.com, Inc., Mother Nature's General Store, Inc. and Michael Barach,
individually in the Superior Court of Suffolk County, Massachusetts, Case No.
99-3087C. In the lawsuit, the plaintiff, a founder and former officer and
director, alleges causes of action including economic duress, breach of
fiduciary duty and unfair and deceptive acts and practices. Mr. Love, among
other things, alleges that he was compelled under economic duress to sign an
agreement in connection with his termination of employment. In addition, Mr.
Love claims that we breached our fiduciary duty to him as a stockholder by
allegedly failing to provide him with certain information in connection with
our May 1999 preferred stock financing. Mr. Love seeks recovery of actual
damages which he alleges to be $50,000,000. We believe that the claims made by
Mr. Love are without merit and intend to defend this lawsuit vigorously.
43
MANAGEMENT
Executive Officers, Directors and Other Key Employees
The following sets forth the names, ages and positions of our executive
officers and directors as of June 30, 1999:
Name Age Position
---- --- --------
Michael I. Barach.......... 41 Chief Executive Officer, President and Director
Michael L. Bayer........... 33 Chief Financial Officer, Treasurer and Secretary
Donald J. Pettini.......... 36 Chief Technology Officer
Sharon L. Rice............. 50 Vice President, Brand Marketing
Jeffrey A. Steinberg....... 36 Chief Marketing Officer
Beverly J. Weich........... 34 Vice President, Sales and Site Development
Michael A. Greeley(1)...... 36 Director
Keith M. Kerman(2)......... 41 Director
Brent R. Knudsen(2)........ 43 Director
Jason G. Olim.............. 30 Director
Marc D. Poirier(1)......... 34 Director
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Executive Officers and Directors
Michael I. Barach has served as our Chief Executive Officer and President and
a director since June 1998. From October 1990 until June 1998, Mr. Barach was
employed by Bessemer Venture Partners, where he specialized in the
telecommunications, retail and electronic commerce categories. Mr. Barach was a
Partner at Bessemer from February 1994 until June 1998. Prior to October 1990,
Mr. Barach held several executive management positions in various retail
organizations. Mr. Barach holds a B.A. from Amherst College, where he graduated
summa cum laude and Phi Beta Kappa. Mr. Barach received a J.D. from Harvard Law
School and a M.B.A. from Harvard Business School, where he graduated as a Baker
Scholar.
Michael L. Bayer has served as our Chief Financial Officer, Treasurer and
Secretary since December 1998, having started with us as our Vice President,
Finance in July 1998. From August 1995 until April 1998, he worked for Lifeline
Systems, a manufacturer and service provider of personal response systems,
first as Assistant Treasurer and then as Treasurer. Prior to that, Mr. Bayer
was Vice President, Strategic Planning for Specialty Loose Leaf, Inc., a custom
manufacturer of office supplies, from March 1995 until August 1995, where he
helped launch a leveraged buyout spin-off. From July 1992 until February 1995,
Mr. Bayer served in various financial management roles with Avery Dennison
Corporation, a multinational manufacturer of office supplies and adhesive
products. Mr. Bayer holds a B.S. in Finance and Investments with Distinction
from Babson College and a M.B.A. with Distinction from Cornell University,
where he was a Fried Fellow. Mr. Bayer is a Chartered Financial Analyst.
Donald J. Pettini has served as our Chief Technology Officer since June 1998.
From March 1996 until April 1998, he worked for Digital Equipment Corporation
as the initial member of the AltaVista Engineering Team, where he led several
projects as Project Director, including MilliCent. From 1985 until February
1996, Mr. Pettini held various engineering roles within Digital Equipment
Corporation, including as a member of the internal trouble-shooting team, and
he specialized in network design and encryption technology.
Sharon L. Rice has served as our Vice President, Brand Marketing since
September 1998. From September 1997 until September 1998, Ms. Rice was Director
of Marketing and Sales for financial cards at Polaroid Corporation. From
September 1995 to June 1997, Ms. Rice was Director of Marketing for
44
BankBoston's credit card business. From June 1988 until August 1995, Ms. Rice
held a series of positions of increasing responsibility at Citibank, leaving as
Vice President of Credit Card Marketing. Ms. Rice received her B.A. from
American University and her M.A. in communication from Emerson College.
Jeffrey A. Steinberg has served as our Chief Marketing Officer since February
1999. Prior to that, Mr. Steinberg was Vice President of Marketing for Net
Grocer, Inc., an online retailer of grocery products, from February 1997
through December 1998. From September 1995 to February 1997, he was a manager
at A.T. Kearney, a management consulting firm, where he was involved with their
consumer products consulting practice and specialized in interactive and
database marketing. From October 1991 to September 1995, Mr. Steinberg worked
in the Deloitte & Touche Consulting Group's Retail and Direct Marketing
practice, first as a senior consultant and then as a manager. Since 1994, Mr.
Steinberg has authored three books on interactive marketing, relationship
marketing and database marketing on behalf of the Direct Marketing Association.
Mr. Steinberg holds a B.A. in Computer Science and Geography from Clark
University and a M.S. in Venture Capital Management from the MIT Sloan School
of Management.
Beverly J. Weich has served as our Vice President, Sales and Site Development
since June 1999 and was our Executive Producer from October 1998 through June
1999, having joined us in July 1998 as Director, Online Marketing. Prior to
that, she was a founder and Vice President, Marketing and Operations at E-
guide, an Internet venture, from February 1996 until June 1998. Ms. Weich first
developed natural product knowledge as General Manager of a full-facility
health club from April 1992 to October 1994, and then as General Manager of a
weight loss clinic from November 1994 to May 1995. Ms. Weich received her
B.B.A., cum laude, in Marketing from University of Massachusetts (Amherst) and
a M.B.A. in Marketing and Entrepreneurial Management from the University of
Southern California (Los Angeles).
Michael A. Greeley has served as a director since May 1999. Since June 1994,
Mr. Greeley has been Senior Vice President of GCC Investments, Inc., the
private equity investment group of GC Companies, Inc., which has as its primary
operating subsidiary General Cinema Theatres. Prior to this position, Mr.
Greeley was a Vice President from December 1992 until June 1994 at Wasserstein
Perella & Co., Inc., an international investment bank specializing in mergers
and acquisitions and corporate finance transactions. Mr. Greeley received a
B.A. with honors from Williams College and a M.B.A. from Harvard Business
School.
Keith M. Kerman, M.D. has served as a director since June 1998. Dr. Kerman is
a General Partner of Morgenthaler Venture Partners, a venture capital firm,
which he joined in April 1997. From February 1995 to March 1997, Dr. Kerman was
a partner at Marquette Venture Partners, a venture capital firm. Prior to 1995,
he was President of Corporate Health Administrators, Inc. and Vice President,
Medical Delivery at U.S. Healthcare, from June 1991 to February 1995. Dr.
Kerman is a board-certified internist. He received his medical and
undergraduate degrees from Brown University, where he graduated Phi Beta Kappa
and magna cum laude. He has a M.B.A. from The Wharton School of the University
of Pennsylvania where he was a Robert Wood Johnson Foundation Scholar.
Jason G. Olim has served as a director since June 1998. Mr. Olim co-founded
CDNow, Inc., an online music retailer, in February 1994 and has been its Chief
Executive Officer since November 1997. Previously, Mr. Olim was employed in the
Professional Services group of Soft-Switch, Inc., a software concern, where he
designed and built software systems for routing mail and documents for domestic
and international clients. Mr. Olim holds a B.A. in Computer Science from Brown
University.
Brent R. Knudsen has served as a director since December 1998. Mr. Knudsen is
currently the Managing Director of North Castle Partners L.L.C., a private
equity firm. Prior to joining North Castle in 1998, Mr. Knudsen served from
November 1997 to July 1998 as President and Chief Executive Officer of GolfWeb,
Inc., a Web site catering to golf enthusiasts, prior to its acquisition by
SportsLine USA, Inc. From September 1996 to November 1997, Mr. Knudsen served
as President of the Sports and Mass Division of Bell Sports, Inc., a bicycle
and bicycle accessory company. From January 1994 to September 1996, Mr. Knudsen
served as a Division President of Specialized Bicycle Components, Inc. From
September 1985 through
45
December 1994, Mr. Knudsen had marketing and business development
responsibilities at the Price Company which was later merged with Costco
Wholesale, Inc. Mr. Knudsen served as the original Vice President of Marketing
and Business Development for Price Club and as Managing Director of Price
Costco Industries. Mr. Knudsen holds degrees from the University of Utah, where
he received a B.A., with highest honors, in Economics and English, and
Georgetown Law School, where he received a J.D.
Marc D. Poirier has served as a director since September 1998. He has been a
General Partner of @Ventures III, L.P., a venture capital firm affiliated with
CMGI, Inc. since August 1998. Mr. Poirier joined CMGI in May 1996 at Planet
Direct, a CMGI subsidiary providing Web portals to consumers through Internet
service providers and other co-branding partners. At Planet Direct, Mr. Poirier
served as Director, Business Development, and then as Vice President of
Electronic Commerce. Mr. Poirier was employed by Ernst & Young LLP in the
Mergers & Acquisitions Group from June 1992 to May 1996 and in the
Entrepreneurial Services Group from September 1986 to August 1990. Mr. Poirier
is a Certified Public Accountant, and he holds a B.S. in Business
Administration from Providence College and a M.B.A. from Harvard Business
School.
Other Key Employees
Set forth below is the name and recent business experience of each of the key
members of our management team not described above.
Selena Anderson has served as our Director, Purchasing since January 1999.
From August 1996 to August 1998, Ms. Anderson was the Director of Nutrition and
Body Care for Nature's Heartland. From January 1996 to June 1996 she was the
East Coast Regional Sales Manager for Jason Cosmetics. From June 1995 to
December 1995, she was a Sales Representative for Matrix Marketing. From
January 1995 to June 1995 she was the Regional Merchandiser for BIN Sales &
Marketing. From March 1994 to October 1994, she was a Purchasing Assistant for
Wild Oats. From May 1993 through December 1993 she was the Northern California
Regional Sales Manager for Stonyfield Farm. From January 1991 to May 1993, she
was a Field Sales Representative for Sunbelt Sales & Marketing. From January
1985 to January 1991, Ms. Anderson was the founder and owner of Vegan Street,
Inc., one of the first mail-order companies in the US dedicated to cruelty-free
and environmentally safe products. Ms. Anderson holds a B.A. in Psychology from
the University of Maryland.
C. Brad Eisold has served as our Director, Merchandising since January 1999.
Prior to joining us, Mr. Eisold served as Director of Grocery, Frozen Foods,
Dairy, Bulk Foods and Beer/Wine departments at Nature's Heartland stores in the
Boston area from June 1996 to August 1998. From November 1994 through June
1996, Mr. Eisold worked with Harris Teeter Supermarkets, Inc., where he
developed and instituted a natural products program for the chain. From May
1994 until November 1994, Mr. Eisold served as Director, Purchasing at Wild
Oats Markets. From February 1991 through November 1993, Mr. Eisold, as Vice
President of Purchasing with Fresh Fields Markets, developed and directed the
programs for the grocery, frozen foods and dairy departments. Mr. Eisold holds
a B.A. in Psychology and Sociology from American International College and an
M.Ed. in Psychology and Counseling from Springfield College.
Neil Hartford has served as our Director, Operations since May 1999. From
April 1998 to May 1999, Mr. Hartford was the Director, North American
Operations for BOL.com, an Internet retailer, where he was responsible for
establishing and directing operations. From March 1997 to April 1998, Mr.
Hartford served as Director, Customer Service for Talbot's Inc., a retailer of
women's clothing. From October 1995 to March 1997, Mr. Hartford was Director,
Catalog Operations for West Marine, Inc., a provider of boating supplies and
equipment. Prior to that, Mr. Hartford served as Director, Operations for
Catalog Ventures, Inc., a jewelry and gift distributor from 1990 to September
1995. Mr. Hartford holds an A.S.B.A. in Business from Northeastern University.
46
Craig N. Weatherby has served as our Director, Content since joining us in
June 1998. From June 1996 to April 1998, Mr. Weatherby researched and wrote The
Arthritis Bible, the lead title from Healing Arts Press for the Spring of 1999.
In February 1997, Mr. Weatherby served as Director of Marketing at Nature's
Heartland, Inc. From November 1992 to April 1998, Mr. Weatherby wrote feature
articles for leading consumer and trade magazines, including Natural Health and
Natural Pharmacy, and operated Write Stuff Marketing, a communications
consultancy producing newsletters and biomedical monographs for major natural
products companies, including Whole Foods Market, Cornucopia Natural Foods,
Wild Harvest/Star Markets and Madis Botanicals. From July 1987 to October 1992
he served as Marketing Manager for the Bread & Circus Whole Foods Supermarket
chain, where he produced a comprehensive educational publications program. Mr.
Weatherby holds a B.A. in History from Windham College.
Board Committees
The board of directors has established an audit committee and a compensation
committee. The audit committee reviews, acts on and reports to the board of
directors with respect to various auditing and accounting matters, including
the recommendations and performance of our independent auditors, the scope of
the annual audits, fees to be paid to the independent auditors, and our
internal accounting and financial control policies and procedures. The members
of the audit committee are presently Messrs. Poirier and Greeley.
The compensation committee has the power to create our executive compensation
policy and determines the salaries and benefits for our employees, consultants,
directors and other individuals compensated by us. The committee also
administers our stock option and stock purchase plans. The members of the
compensation committee are presently Messrs. Kerman and Knudsen.
Director Compensation
Directors are reimbursed for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors and for meetings of any committees
of the board of directors on which they serve. No employee will receive
separate compensation for services rendered as a director. Non-employee
directors are also eligible for participation in our 1999 Non-Employee Director
Stock Option Plan. See the description of that Plan under the section of this
prospectus called "Management -- Stock Plans." In addition, in July 1998, we
granted Mr. Olim an option to purchase 80,000 shares of our common stock with
an exercise price of $.03 per share in consideration for his services on our
board of directors.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between the board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
47
Executive Compensation
The following table sets forth all compensation awarded to, earned by or paid
to our Chief Executive Officer and to another individual who served as our
Chief Executive Officer during 1998 for services rendered in all capacities
during 1998. No other executive officer or employee had compensation in excess
of $100,000 during 1998. We may refer to these officers as our named executive
officers in other parts of this prospectus.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
-------------------- --------------------
Other Annual Number of Securities All Other
Name and Principal Position Salary Compensation Underlying Options Compensation
- --------------------------- ------- ------------ -------------------- ------------
Michael I. Barach, Chief
Executive Officer and
President(1)........... $37,840 -- 3,100,884 --
Ross A. Love, former
Chief Executive Officer
and President(2)....... $18,846 $3,800(3) 1,170,000(2) $41,123(4)
- --------
(1) Mr. Barach assumed the offices of Chief Executive Officer and President in
June 1998.
(2) Mr. Love resigned as Chief Executive Officer and President in June 1998 and
resigned as an employee and director in August 1998. Unvested options to
purchase 1,053,112 shares automatically expired in connection with his
resignation of employment in August 1998.
(3) Includes $3,000 in relocation expenses.
(4) Represents severance payments in the amount of $26,923 and forgiveness of
indebtedness in the amount of $14,200 in connection with Mr. Love's
resignation of employment.
Option Grants During the Year Ended December 31, 1998
The following table sets forth specified information regarding options
granted to each of the named executive officers during the year ended December
31, 1998. We have not granted any stock appreciation rights. The options were
granted under our 1998 Stock Plan. In general, options granted under the plan
vest over four years, with 25% of the option shares granted vesting on the one-
year anniversary of the grant date and the remainder vesting in 12 equal
quarterly installments, and expire on the tenth anniversary of the date of
grant, subject to earlier termination in certain situations related to
resignation or termination of employment. The percentage of total options
granted to employees in 1998 shown in the table below is based on options to
purchase an aggregate of 7,896,694 shares of common stock granted during the
year ended December 31, 1998. Potential realizable values are net of exercise
prices and before taxes, and are based on an assumed initial public offering
price of $ per share and the assumption that our common stock appreciates at
the annual rate shown, compounded annually, from the date of grant until the
expiration of the option term. These numbers are calculated based on Securities
and Exchange Commission requirements and do not reflect our projection or
estimate of future stock price growth. The amounts shown in this table
represent hypothetical gains that could be achieved for the respective options
if exercised at the end of the option term. Actual gains, if any, on stock
option exercises will depend on the future performance of the common stock, the
optionholders' continued employment through the option period and the date on
which the options are exercised.
With respect to Mr. Barach's options, options to purchase 260,368 shares are
currently exercisable as of June 30, 1999 and the balance of the options
continue to vest in different increments through October 1, 2002. With respect
to Mr. Love's options, the board of directors accelerated the vesting of
options to purchase 116,888 shares, and unvested options to purchase 1,053,112
shares automatically expired in connection with his
48
resignation of employment in August 1998. Since none of Mr. Love's options
listed below were outstanding as of June 30, 1999, the potential realizable
values at assumed annual rates of stock price appreciation are not included in
the table below.
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
--------------------- ------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price Per Expiration
Name Granted in 1998 Share Date 5% 10%
---- ---------- ---------- --------- ---------- -------------- ---------------
Michael I. Barach....... 1,408,000 17.8% $0.03 6/10/08
Michael I. Barach....... 885,000 11.2% $0.03 6/15/08
Michael I. Barach....... 807,884 10.2% $0.10 12/22/08
Ross A. Love............ 255,000 3.2% $0.03 6/10/08 -- --
Ross A. Love............ 915,000 11.6% $0.03 6/15/08 -- --
1998 Option Exercises and Year-End Option Values
The following table sets forth certain information concerning the number and
value of options exercised by each of the named executive officers as of
December 31, 1998 and the number and value of unexercised options held by each
of the named executive officers at December 31, 1998. The value of unexercised
in-the-money options represents the total gain which would be realized if all
in-the-money options held at December 31, 1998 were exercised, determined by
multiplying the number of shares underlying the options by the difference
between an assumed initial public offering price of $ per share and the per
share option exercise price. An option is in-the-money if the fair market value
of the underlying shares exceeds the exercise price of the option.
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options at Options at
December 31, 1998 December 31, 1998
------------------------- -------------------------
Number of
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
Michael I. Barach....... -- -- 586,669 2,514,215 $ $
Ross A. Love............ 116,888 -- -- -- --
Stock Plans
1998 Stock Plan. Our board of directors and stockholders adopted the
MotherNature.com, Inc. 1998 Stock Plan in June 1998. The aggregate number of
shares of common stock which may be issued under the 1998 Stock Plan was
originally 12,655,219. Under the 1998 Stock Plan, we are authorized to grant
incentive stock options and non-qualified stock options, as well as awards of
common stock and opportunities to make direct purchases of common stock to
employees, consultants, directors and officers. The 1998 Stock Plan is
administered by the compensation committee. The 1998 Stock Plan provides that
the compensation committee has the authority to select the participants and
determine the terms of the stock options, awards and purchase rights granted
under the 1998 Stock Plan. An incentive stock option is not transferable by the
recipient except by will or by the laws of descent and distribution. Non-
qualified stock options and other awards are transferable only to the extent
provided in the agreement relating to such option or award or in response to a
valid domestic relations order. Generally, no incentive stock options may be
exercised more than three months following termination of employment. However,
in the event that termination is due to death or disability, the stock option
is exercisable
49
for a maximum of 180 days after such termination. In July 1999, the board of
directors and the stockholders voted to terminate the 1998 Stock Plan with
respect to future grants of options or stock effective on the consummation of
the offering. As of June 30, 1999, we had outstanding under the 1998 Stock Plan
incentive stock options to purchase 7,264,747 shares of common stock and non-
qualified stock options to purchase 363,500 shares of common stock.
1999 Stock Plan. Our 1999 Stock Plan was adopted by our board of directors
in July 1999 and approved by our stockholders in August 1999. The 1999 Stock
Plan provides for the grant of stock-based awards to employees, officers and
directors of, and consultants or advisors to, MotherNature.com and its
subsidiaries, including incentive stock options and non-qualified stock options
and other equity-based awards. Incentive stock options may be granted only to
our employees. A total of shares of common stock may be issued upon the
exercise of options or other awards granted under the 1999 Stock Plan. The
maximum number of shares that may be granted to any employee under the 1999
Stock Plan shall not exceed shares of common stock during any calendar
year.
The 1999 Stock Plan is administered by the board of directors and the
compensation committee. The 1999 Stock Plan provides that the board of
directors and the compensation committee have the authority to select the
persons to whom awards are granted and determine the terms of each award,
including the number of shares of common stock to be granted. Payment of the
exercise price of an award may be made in cash, shares of common stock, a
combination of cash or stock or by any other method approved by the board or
compensation committee, consistent with Section 422 of the Internal Revenue
Code and Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
Unless otherwise permitted by us, awards are not assignable or transferable
except by will or the laws of descent and distribution.
The board of directors or the compensation committee may amend, modify or
terminate any award granted or made under the 1999 Stock Plan, so long as such
amendment, modification or termination would not materially and adversely
affect the participant. The board of directors or the compensation committee
may also accelerate or extend the date or dates on which all or any particular
option or options granted under the 1999 Stock Plan may be exercised. No
options or other equity-based awards have been granted to date under the 1999
Stock Plan.
1999 Non-Employee Director Stock Option Plan. Our 1999 Non-Employee Director
Stock Option Plan, or Director Plan, was adopted by the board of directors in
July 1999 and approved by the stockholders in August 1999 and becomes effective
on the date on which our common stock is registered under the Exchange Act. A
total of 250,000 shares of common stock have been authorized for issuance under
the Director Plan.
The Director Plan is administered by the compensation committee. Under the
Director Plan, each non-employee director who is or becomes a member of the
board of directors is automatically granted on the date on which the common
stock becomes registered under the Exchange Act or, if not a director on that
date, the date first elected to the board of directors, an initial option to
purchase 20,000 shares of common stock. In addition, provided that the director
continues to serve as a member of the board of directors, each non-employee
director will be automatically granted on the third anniversary of his or her
initial option grant date and each three years thereafter an option to purchase
20,000 shares of common stock. Provided that the director continues to serve as
a member of the board of directors, one-third of the shares included in each
grant will become exercisable on each of the first, second and third
anniversaries of the date of grant. All options granted under the Director Plan
will have an exercise price equal to the fair market value of the common stock
on the date of grant and a term of 10 years from the date of grant. Options may
not be transferred except by will or by the laws of descent and distribution or
by a domestic relations order. Unexercisable options terminate when the
director ceases to be a director for any reason other than death or permanent
disability. Exercisable options may be exercised at any time during the option
term. In the event that a director dies or is permanently disabled, any options
that are not exercisable will become exercisable, and the optionee or his or
her representative, heir or legatee may exercise all options for the remaining
exercise period of the option. The term of the Director Plan is 10 years,
unless sooner terminated by vote of the board of directors. No options have
been granted to date under the Director Plan.
50
1999 Employee Stock Purchase Plan. The 1999 Employee Stock Purchase Plan was
adopted by the board of directors in July 1999 and approved by the stockholders
in August 1999. The 1999 Employee Stock Purchase Plan provides for the issuance
of a maximum of 750,000 shares of common stock.
The 1999 Employee Stock Purchase Plan is administered by the board of
directors and the compensation committee. All of our employees whose customary
employment is for more than 20 hours per week and for more than five months in
any calendar year and who have completed more than 90 days of employment with
us on or before the first day of any six-month payment period are eligible to
participate in the 1999 Employee Stock Purchase Plan. Outside directors and
employees who would own 5% or more of the total combined voting power or value
of our stock immediately after the grant may not participate in the 1999
Employee Stock Purchase Plan. To participate in the 1999 Employee Stock
Purchase Plan, an employee must authorize us to deduct an amount not less than
one percent nor more than 10 percent of a participant's total cash compensation
from his or her pay during each six-month payment periods. The first payment
period will commence on a date to be determined by the board of directors and
end on December 31, 1999. Thereafter, the payment periods will commence on the
first day of January and July and end on the last day of the following June and
December, respectively, of each year, but in no case shall an employee be
entitled to purchase more than shares in any one payment period. The
exercise price for the option granted in each payment period is 85% of the
lesser of the average market price of the common stock on the first or last
business day of the payment period, in either event rounded up to the nearest
cent. If an employee is not a participant on the last day of the payment
period, such employee is not entitled to exercise his or her option, and the
amount of his or her accumulated payroll deductions will be refunded. Options
granted under the 1999 Employee Stock Purchase Plan may not be transferred or
assigned. An employee's rights under the 1999 Employee Stock Purchase Plan
terminate upon his or her voluntary withdrawal from the plan at any time or
upon termination of employment. No options have been granted to date under the
1999 Employee Stock Purchase Plan.
51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of June 30, 1999, and as adjusted to reflect
the sale of the shares of common stock offered in this prospectus, by:
. each named executive officer;
. each of our directors;
. each person known by us to be the beneficial owner of more than 5% of
our common stock; and
. all executive officers and directors as a group.
Unless otherwise noted below, the address of each person listed on the table
is c/o MotherNature.com, Inc., One Concord Farms, 490 Virginia Road, Concord,
Massachusetts 01742, and each person has sole voting and investment power over
the shares shown as beneficially owned except to the extent authority is shared
by spouses under applicable law and except as set forth in the footnotes to the
table.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock issuable by us to a
person or entity listed in the table pursuant to options or warrants that may
be exercised within 60 days after June 30, 1999 are deemed to be beneficially
owned and outstanding for purposes of calculating the number of shares and the
percentage beneficially owned by that person or entity. However, these shares
are not deemed to be beneficially owned and outstanding for purposes of
computing the percentage beneficially owned by any other person or entity.
For purposes of calculating the percentage of common stock beneficially owned
by any person, the number of shares deemed outstanding before the offering
includes:
. shares of common stock outstanding as of June 30, 1999;
. shares of common stock issuable upon the conversion of convertible
preferred stock outstanding as of June 30, 1999; and
. shares of common stock issuable upon the exercise of options and
warrants which may be exercised by that person or entity within 60 days
of June 30, 1999.
For purposes of calculating the percentage beneficially owned by any person
or entity, the number of shares deemed outstanding after the offering includes:
. all shares deemed to be outstanding before the offering; and
. shares being sold in this offering.
52
Percentage of Common
Stock Outstanding
------------------------
Number of Shares Before After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------ ------------------ ---------- ----------
Executive Officers and
Directors:
Michael I. Barach(1)............ 1,568,072 2.1%
Ross A. Love.................... 1,480,388 2.0
Michael A. Greeley(2)........... 4,735,743 6.5
Keith M. Kerman(3).............. 9,269,162 12.7
Jason G. Olim(4)................ 105,645 *
Brent R. Knudsen(5)............. -- --
Marc D. Poirier(6).............. 9,269,162 12.7
All executive officers and
directors as a group
(12 persons)(7)................ 26,781,817 36.4
Five Percent Stockholders:
CMG@Ventures II, LLC(8)......... 9,269,162 12.7
c/o CMGI, Inc.
100 Brickstone Square
Andover, MA 01810
Morgenthaler Venture Partners
IV, L.P (9).................... 9,269,162 12.7
50 Public Square
Suite 2700
Cleveland, OH 44113
Bessemer Venture Entities (10).. 9,269,162 12.7
83 Walnut Street
Wellesley, MA 02481
North Castle Entities (11)...... 5,437,121 7.5
60 Arch Street
Greenwich, CT 06830
Chestnut Hill Nature, LLC....... 4,735,743 6.5
c/o GCC Investments, Inc.
1300 Boylston Street
Chestnut Hill, MA 02467
Markas Holding BV............... 4,735,743 6.5
c/o LVMH Technology
525 Market Street
33rd floor
San Francisco, CA 94105
Covestco-AtEura, LLC............ 4,735,743 6.5%
c/o Barnard & Co.
590 Madison Avenue
37th Floor
New York, NY 10022
- --------
* Less than 1%
(1) Includes 1,148,764 shares held by Mr. Barach. Also includes 64,516 shares
issuable upon exercise of a warrant held by Mr. Barach and 354,792 shares
deemed to be beneficially owned by Mr. Barach pursuant to options
exercisable within 60 days of June 30, 1999.
(2) Includes 4,735,743 shares held by Chestnut Hill Nature LLC, a wholly-owned
subsidiary of GCC Investments, Inc. Mr. Greeley is a Senior Vice President
of GCC Investments, Inc. and may be deemed to share voting and investment
power with respect to all shares held by Chestnut Hill Nature LLC. Mr.
Greeley disclaims beneficial ownership of such shares.
53
(3) Includes 9,204,647 shares held by Morgenthaler Venture Partners IV, L.P.
Also includes 64,516 shares issuable upon exercise of a warrant held by
Morgenthaler Venture Partners IV, L.P. Mr. Kerman is a General Partner of
Morgenthaler Venture Partners IV, L.P. and may be deemed to share voting
and investment power with respect to all shares held by Morgenthaler
Venture Partners IV, L.P. Mr. Kerman disclaims beneficial ownership of such
shares.
(4) Includes 25,000 shares deemed to be beneficially owned by Mr. Olim pursuant
to options exercisable within 60 days of June 30, 1999.
(5) Does not include 5,156,303 shares held by North Castle Partners II, L.P.,
127,356 shares held by NCP Co-Investment Fund, L.P., and 153,462 shares
held by NCP-MNC, L.P. Mr. Knudsen is a limited partner of NCP GP II, L.P.,
which is the General Partner of North Castle Partners II, L.P., and Mr.
Knudsen is a Managing Director of North Castle GP II, LLC, which serves as
the general partner of NCP GP II, L.P. as well as NCP-MNC, L.P. Mr. Knudsen
is also a Managing Director of NCP Co-Investment G. P., LLC, which is the
general partner of NCP Co-Investment Fund, L.P. Mr. Knudsen does not share
voting and investment power with respect to the shares held by North Castle
Partners II, L.P., NCP Co-Investment Fund, L.P. and NCP-MNC, L.P.
(6) Includes 9,204,646 shares held by CMG@Ventures II, LLC. Also includes
warrants for 64,516 shares issuable upon exercise of a warrant held by
CMG@Ventures II, LLC. Mr. Poirier is a General Partner of @Ventures
Partners III, L.P. which is an affiliate of CMG@Ventures II, LLC. Mr.
Poirier may be deemed to share voting and investment power with respect to
all shares held by CMG@Ventures II, LLC. Mr. Poirier disclaims beneficial
ownership of such shares.
(7) Includes 25,854,832 shares of common stock, 733,437 shares subject to
options exercisable within 60 days of June 30, 1999 and 193,548 shares
issuable upon exercise of warrants.
(8) Includes 9,204,646 shares held by CMG@Ventures II, LLC. Also includes
64,516 shares issuable upon exercise of a warrant held by CMG@Ventures II,
LLC.
(9) Includes 9,204,646 shares held by Morgenthaler Venture Partners IV, L.P.
Also includes 64,516 shares issuable upon exercise of a warrant held by
Morgenthaler Venture Partners IV, L.P.
(10) Includes 5,159,051 shares held by Bessemer Venture Partners IV L.P.,
3,160,649 shares held by Bessec Ventures IV L.P. and 884,946 shares held
by Bessemer Venture Investors L.P. Also includes 32,258 shares issuable
upon exercise of a warrant held by Bessemer Venture Partners IV L.P. and
32,258 shares issuable upon exercise of a warrant held by Bessec Ventures
IV, L.P.
(11) Includes 5,156,303 shares held by North Castle Partners II, L.P., 127,356
shares held by North Castle Co-Investment Fund, L.P. and 153,462 shares
held by NCP-MNC, L.P.
54
CERTAIN TRANSACTIONS
We believe that all of the transactions set forth below were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us
and our officers, directors, principal stockholders and their affiliates, will
be approved by a majority of the board of directors, including a majority of
the independent and disinterested members of the board of directors, and will
be on terms no less favorable to us than those that could be obtained from
unaffiliated third parties.
Sales of Stock, Notes and Warrants
Convertible Note and Warrant Financing. In May 1998, we issued and sold
$400,000 of secured convertible promissory notes and warrants to purchase an
aggregate of 258,064 shares of our common stock at an exercise price of $0.31
per share to five accredited investors. Pursuant to their terms, the notes
converted into an aggregate of 1,290,322 shares of series A preferred stock
upon the closing of the series A convertible preferred stock financing
discussed below. Investors owning five percent or more of our shares and our
Chief Executive Officer (who is also President and a director) who participated
in this transaction include:
Investor Promissory Note Warrant Shares
-------- --------------- --------------
CMG@ Ventures II, LLC........................ $100,000 64,516
Morgenthaler Ventures IV, L.P................ $100,000 64,516
Bessemer Venture Entities.................... $100,000 64,516
Michael Barach............................... $100,000 64,516
Marc Poirier, one of our directors, is a general partner of @Ventures III,
L.P., which is an affiliate of CMG@ Ventures II, LLC. Keith Kerman, one of our
directors, is a general partner of Morgenthaler Venture Partners IV, L.P.
Bessemer Venture Partners IV L.P., Bessec Ventures IV L.P. and Bessemer Venture
Investors IV L.P. are affiliated entities, collectively own greater than 10% of
our shares and are collectively referred to in this prospectus as the Bessemer
Venture entities.
Series A Preferred Stock Financing. In June 1998, we issued and sold an
aggregate of 21,451,613 shares of series A preferred stock at a price per share
of $0.31 to seven accredited investors. In July 1998, we issued and sold an
additional 1,864,484 shares of series A preferred stock to nine accredited
investors. The series A shares will be converted into an aggregate of
23,316,097 shares of common stock upon the closing of this offering. We sold
80,645 shares of series A preferred stock to Jason Olim, one of our directors,
as part of this financing. Investors owning five percent or more of our shares
who purchased shares of series A preferred stock and the number of shares each
purchased, including shares issued upon conversion of the promissory notes
discussed under the heading "Convertible Note and Warrant Financing" above,
include:
Investor Number of Series A Shares
-------- -------------------------
CMG@ Ventures II, LLC............................. 6,451,613
Morgenthaler Venture Partners IV, L.P............. 6,451,613
Bessemer Venture Entities......................... 6,451,613
Michael Barach.................................... 483,871
Series B-1 Preferred Stock Financing. In December 1998, we issued and sold
19,950,126 shares of series B-1 preferred stock at a price per share of $0.5213
to 13 accredited investors. In January 1999, we issued and sold an additional
3,069,250 shares of series B-1 preferred stock to one accredited investor. The
series B-1 shares will be converted into an aggregate of 23,019,375 shares of
common stock upon the closing of this offering. Brent Knudsen, one of our
directors, is a limited partner of NCP GP II, L.P., which is the General
Partner of North Castle Partners II, L.P., and Mr. Knudsen is a Managing
Director of North Castle GP II, LLC, which serves as the general partner of NCP
GP II, L.P., as well as NCP-MNC, L.P. Mr. Knudsen is also a Managing Director
of NCP Co-Investment G.P., LLC, which is the general partner of NCP Co-
Investment Fund, L.P. North Castle Partners II, L.P., North Castle Co-
Investment Fund, L.P. and NCP-MNC, L.P. are collectively referred to in this
prospectus as the North Castle entities. NCP-MNC, L.P. purchased 3,069,250
55
shares of series B-1 preferred stock. Investors owning five percent or more of
our shares who purchased shares of series B-1 preferred stock and the number of
shares each purchased include:
Number of Series
Investor B-1 Shares
-------- ----------------
CMG@Ventures II, LLC....................................... 2,397,852
Morgenthaler Venture Partners IV, L.P. .................... 2,397,852
Bessemer Venture Entities.................................. 2,397,852
North Castle Entities...................................... 3,069,250
Series C Preferred Stock Financing. In May 1999, we issued and sold
18,409,629 shares of series C preferred stock at a price per share of $2.2787
to 16 accredited investors. These shares will be converted into an aggregate of
19,866,442 shares of common stock upon the closing of this offering, after
giving effect to the amendment to our certificate of incorporation described
below under the heading "Changes in Preferred Stock Conversion Features." Mr.
Michael Greeley, one of our directors, is a Senior Vice President of GCC
Investments, Inc., which wholly-owns Chestnut Hill Nature, LLC. Chestnut Hill
Nature, LLC purchased 4,388,468 shares of series C preferred stock. Investors
owning five percent or more of our shares who purchased shares of series C
preferred stock and the number of shares purchased include:
Number of Shares
of Common Stock
Investor Number of Series C Shares upon Conversion
-------- ------------------------- ----------------
CMG@ Ventures II, LLC............ 329,136 355,181
Morgenthaler Venture Partners,
L.P. ........................... 329,136 355,181
Bessemer Venture Entities........ 329,136 355,181
North Castle Entities............ 2,194,234 2,367,871
Covestco-AtEura LLC.............. 4,388,468 4,735,743
Markas Holding B.V............... 4,388,468 4,735,743
Chestnut Hill Nature, LLC........ 4,388,468 4,735,743
Registration Rights. In connection with the preferred stock financings, we
granted registration rights to the preferred stockholders. See "Description of
Securities - Registration Rights."
Changes in Preferred Stock Conversion Features
On July 30, 1999, we filed an amendment to our certificate of incorporation
increasing the number of shares of common stock into which each share of
series C preferred stock will automatically convert in connection with a public
offering of our equity securities from one share of common stock to
approximately 1.08 shares of common stock, subject to certain conditions
related to the offering. At the same time, holders of our series A shares,
series B-1 shares and series C shares agreed to automatic conversion of their
series A shares, series B-1 shares and series C shares, respectively, into
shares of our common stock effective upon the closing of this offering.
Agreements with Affiliates of CMG@ Ventures II, LLC
We have a Web site hosting agreement with NaviSite, Inc. and have an online
advertising agreement with Lycos, Inc. During fiscal 1998 and the six months
ended June 30, 1999, we paid service fees to NaviSite of $22,643 and $52,100,
respectively, and advertising fees to Lycos of $318,325 and $214,365,
respectively. NaviSite is a majority owned subsidiary of CMGI, Inc. and 17.05%
of Lycos is owned by CMGI. CMGI, through its venture capital fund CMG@ Ventures
II, LLC, owns greater than five percent of our outstanding common stock.
56
Certain Agreements
In connection with Ross Love's resignation of employment on August 7, 1998,
we entered into a termination agreement whereby we agreed to pay Mr. Love
salary continuation in the amount of $70,000 per year through May 31, 2000,
forgive $21,100 in indebtedness incurred by Mr. Love while he was an employee,
pay up to $3,000 of Mr. Love's relocation expenses and accelerate the vesting
of Mr. Love's incentive stock options to purchase 116,888 shares of our common
stock.
57
DESCRIPTION OF SECURITIES
The following description of our capital stock and certain provisions of our
restated certificate of incorporation and by-laws are summaries and are
qualified by reference to the certificate and the by-laws. Copies of these
documents have been filed with the Securities and Exchange Commission as
exhibits to our registration statement, of which this prospectus forms a part.
The descriptions of the common stock and preferred stock reflect changes to our
capital structure that will occur upon the closing of this offering.
Upon the completion of this offering, our authorized capital stock will
consist of shares of common stock, par value $.01 per share, and shares of
preferred stock, par value $.01 per share.
Common Stock
As of June 30, 1999, there were 72,733,697 shares of common stock outstanding
and held of record by 48 stockholders, assuming conversion of all outstanding
shares of preferred stock. In addition, we have reserved an aggregate of
11,655,219 shares of common stock for issuance under our 1998 Stock Plan,
shares of common stock for issuance under our 1999 Stock Plan, 750,000 shares
of common stock for issuance under our 1999 Employee Stock Purchase Plan,
250,000 shares of common stock for issuance under our 1999 Non-Employee
Director Stock Plan and 1,207,317 shares of common stock for issuance upon the
exercise of outstanding common stock purchase warrants.
The holders of common stock are entitled to one vote for each share of common
stock held of record on our books for the election of directors and on all
matters submitted to a vote of stockholders. The holders of common stock are
entitled to receive ratably dividends, if any, when, as and if declared by the
board of directors out of assets legally available therefor, subject to any
preferential dividend rights of any outstanding preferred stock. Upon our
dissolution, liquidation or winding up, the holders of common stock are
entitled to receive ratably our net assets available after the payment of all
debts and other liabilities, subject to the preferential rights of any
outstanding preferred stock. Holders of the common stock have no preemptive,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock that we may designate and issue in the future. Upon the closing of this
offering, there will be no shares of preferred stock outstanding.
Preferred Stock
Upon the closing of this offering, the board of directors will be authorized,
without further vote or action by the stockholders, to issue from time to time
up to an aggregate of shares of preferred stock in one or more series and to
fix or alter the designations, rights, preferences and privileges and any
qualifications, limitations or restrictions of the shares of each such series
of preferred stock, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series, any or all of which may
be greater than the rights of common stock. The issuance of preferred stock
could adversely affect the voting power of holders of common stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control. We have no present plans to issue any shares of preferred
stock.
Warrants
In April 1998, we issued warrants to purchase an aggregate of 300,000 shares
of our common stock at an exercise price of $.01 per share, exercisable at any
time prior to April 29, 2003. These warrants include a cashless exercise
feature, and the holders are entitled to certain customary antidilution
protection, including
58
adjustments to the number of shares of common stock issuable upon exercise of
the warrants in the event of a subdivision or combination of the common stock
or the payment of a stock dividend on our common stock.
In May 1998, we issued warrants to purchase an aggregate of 258,064 shares of
our common stock at an exercise price of $0.31 per share, exercisable at any
time prior to May 1, 2006. These warrants include a cashless exercise feature,
and the holders are entitled to certain customary antidilution protection,
including adjustments to the number of shares of common stock issuable upon
exercise of the warrants in the event of a subdivision or combination of our
common stock or payment of a stock dividend on our common stock. These warrants
were issued in connection with our convertible note and warrant financing. See
"Certain Transactions- Sales of Stock, Notes and Warrants." The holders of the
warrants are entitled to registration rights pursuant to the registration
rights agreement with respect to the shares of common stock issuable upon
exercise of the warrants. These registration rights are the same as those
afforded the parties to the registration rights agreement. The registration
rights agreement and applicable registration rights are discussed below under
the heading "Registration Rights."
In connection with a subordinated loan and equipment lease financing in
December 1998, we issued warrants to purchase an aggregate of 495,261 shares of
common stock at an exercise price of $0.5028 per share, exercisable at any time
prior to the earlier of December 4, 2005 or three years from the effective date
of our initial public offering. The warrants include a cashless exercise
feature, and the holders are entitled to certain customary antidilution
protection, including adjustments to the number of shares of common stock
issuable in the event of a merger or sale of assets, reclassification of
shares, subdivision or combination of our common stock or payment of a stock
dividend on our common stock. The holder of the warrants is entitled to
registration rights pursuant to the registration rights agreement with respect
to the shares of common stock issuable upon exercise of the warrants. These
registration rights are the same as those afforded the parties to the
registration rights agreement. The registration rights agreement and applicable
registration rights are discussed below under the heading "Registration
Rights."
In May 1999, we issued a warrant to purchase an aggregate of 137,140 shares
of our common stock at an exercise price per share of $2.7344, exercisable at
any time prior to May 12, 2004. This warrant includes a cashless exercise
feature, and the holder is entitled to certain customary antidilution
protection, including adjustments to the number of shares of common stock
issuable upon exercise of the warrant in the event of a subdivision or
combination of our common stock or payment of a stock dividend on our common
stock. Pursuant to antidilution adjustments, an additional 10,852 shares of
common stock will be issuable under the warrant, subject to certain conditions
related to the offering. The holder of the warrants is entitled to registration
rights pursuant to the registration rights agreement with respect to the shares
of common stock issuable upon exercise of the warrants. These registration
rights are the same as those afforded the parties to the registration rights
agreement. The registration rights agreement and applicable registration rights
are discussed below under the heading "Registration Rights."
In June 1999, we issued a warrant to purchase an aggregate of up to 6,000
shares of our common stock at an exercise price per share of $2.50, exercisable
at any time prior to June 22, 2002. This warrant includes a cashless exercise
feature, and the holder is entitled to certain customary antidilution
protection, including adjustments to the number of shares of common stock
issuable upon exercise of the warrant in the event of a subdivision or
combination of our common stock or payment of a stock dividend on our common
stock.
Convertible Note
Pursuant to the loan agreement with our subordinated lender, we granted the
lender the right to convert, on one occasion, up to 30% of the original
aggregate principal amount of all advances under the loan agreement into shares
of our common stock at an exercise price of $0.50 per share. This conversion
option expires on December 4, 1999. The maximum amount that we are entitled to
borrow under the loan agreement is $3,000,000. As of the date of this
prospectus, we have not borrowed any money under the loan agreement. The lender
is entitled to registration rights pursuant to the registration rights
agreement with respect to the shares of common stock issuable upon exercise of
the conversion option. The registration rights agreement and applicable
registration rights are discussed below under the heading "Registration
Rights."
59
Registration Rights
Pursuant to the terms of a registration rights agreement, after this
offering, the holders of approximately 68,256,532 shares of common stock,
warrants to acquire 901,317 shares of common stock and options to acquire
2,435,991 shares of common stock will be entitled to certain rights with
respect to the registration of such shares under the Securities Act. Under the
terms of the registration rights agreement, if we propose to register any of
our securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, the holders
are entitled to notice of such registration and are entitled to include shares
of their common stock therein. Additionally, the holders are entitled to
certain demand registration rights pursuant to which they may require us to
file a registration statement under the Securities Act at our expense with
respect to their shares of common stock, and we are required to use our best
efforts to effect that registration. We are not required to effect more than
two of these demand registrations. In addition, the holders are entitled to
demand registration rights pursuant to which they may require us to file a
registration statement under the Securities Act on Form S-3 at our expense with
respect to their shares of common stock, and we are required to use our best
efforts to effect that registration. We are not required to effect more than
one of these Form S-3 demand registrations in any twelve-month period. All of
these registration rights are subject to conditions and limitations, including
the right of the underwriters of an offering to limit the number of shares
included in such registration and our right not to effect a requested
registration within six months following any offering of our securities,
including this offering. In addition, our obligation to register shares of
common stock terminates immediately with respect to a security holder holding
2% or less of our outstanding shares, provided that all shares held by the
holder may be publicly sold within a three-month period pursuant to the
Securities Act. In any event, all registration rights terminate four years from
the date of this prospectus.
Anti-Takeover Effects of Provisions of Delaware Law and Our Certificate of
Incorporation and By-laws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 of Delaware law
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. A "business combination" is defined as a
merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder. Subject to various exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within the past three years did own, 15% or more of a corporation's voting
stock. This statute could prohibit or delay the accomplishment of mergers or
other takeover or change in control attempts with respect to us and,
accordingly, may discourage attempts to acquire us.
In addition, some provisions of the certificate and by-laws may be deemed to
have an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might deem to be in his or her best
interest. The existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
These provisions include:
Stockholder Action; Special Meeting of Stockholders. The certificate of
incorporation provides that stockholders may not take action by written
consent, but only at a duly called annual or special meeting of stockholders.
The certificate of incorporation further provides that special meetings of our
stockholders may be called only by the chairman of the board of directors, and
in no event may the stockholders call a special meeting. Thus, without approval
by the board of directors or chairman, stockholders may take no action between
meetings.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The by-laws provide that a stockholder seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice of this
60
intention in writing. To be timely, a stockholder's notice must be delivered to
or mailed and received at our principal executive offices not less than 120
days prior to the first anniversary of the date of our notice of annual meeting
provided with respect to the previous year's annual meeting of stockholders.
However, if no annual meeting of stockholders was held in the previous year or
the date of the annual meeting of stockholders has been changed to be more than
30 calendar days from the time contemplated at the time of the previous year's
proxy statement, then a proposal shall be received no later than the close of
business on the 10th day following the date on which notice of the date of the
meeting was mailed or a public announcement was made, whichever first occurs.
The by-laws also include a similar requirement for making nominations at
special meetings and specify requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations for
directors at an annual or special meeting of stockholders.
Authorized but Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval, subject to certain limitations imposed by the Nasdaq National Market.
These additional shares may be utilized for a variety of corporate acquisitions
and employee benefit plans. The existence of authorized but unissued and
unreserved common stock and preferred stock could render more difficult or
discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
Super-majority Voting. Delaware law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
require a greater percentage. We have provisions in our certificate of
incorporation and by-laws which require a super-majority vote of the
stockholders to amend, revise or repeal anti-takeover provisions.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that, to the extent permitted by
Delaware law, our directors shall not be personally liable to us or our
stockholders for monetary damages for any breach of fiduciary duty as a
director. Under Delaware law, the directors have a fiduciary duty to us that is
not eliminated by this provision of the certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to us, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or that involve
intentional misconduct or knowing violations of law, for action leading to
improper personal benefit to the director and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by Delaware
law. This provision also does not affect the directors' responsibilities under
any other laws, such as the federal securities laws.
Our certificate of incorporation further provides for the indemnification of
our directors and officers to the fullest extent permitted by Section 145 of
the Delaware corporate law, provided that this provision shall not eliminate or
limit the liability of a director:
. for any breach of the director's duty of loyalty to the corporation or
its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. arising under Section 174 of the Delaware corporate law; or
. for any transaction from which the director derived an improper personal
benefit.
Transfer Agent and Registrar
Upon the closing of this offering, the transfer agent and registrar for the
common stock will be ChaseMellon Shareholder Services, LLC.
61
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and we make no prediction as to the effect, if any, that market sales of
shares of common stock or the availability of shares of common stock for sale
will have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of the common stock and could impair our future ability to
raise capital through the sale of equity securities.
Upon the closing of this offering, we will have an aggregate of shares of
common stock outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options or warrants. Of the
outstanding shares, all of the shares sold in this offering will be freely
tradable, except that any shares purchased by "affiliates" (as that term is
defined in Rule 144 under the Securities Act), may only be sold in compliance
with the limitations described below. The remaining 72,733,697 shares of common
stock will be deemed "restricted securities" as defined in Rule 144. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144, including Rule
144(k), or Rule 701 promulgated under the Securities Act, which rules are
summarized below. Giving effect to the lock-up agreements described below and
the provisions of Rule 144, including Rule 144(k), and Rule 701, shares will be
available for sale in the public market as follows:
Number
of Shares Date
--------- ----
2,370,000 Immediately after the date of this prospectus
1,300,744 At various times after 90 days from the date of this
prospectus (Rules 144 and 701)
69,062,953 At various times after 180 days from the date of
this prospectus (subject, in some cases, to volume limitations)
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate of ours,
who has beneficially owned shares for at least one year is entitled to sell,
within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of common stock, approximately shares immediately
after this offering, or the average weekly trading volume in the common stock
during the four calendar weeks preceding the date on which notice of such sale
is filed, subject to restrictions. In addition, a person who is not deemed to
have been an affiliate at any time during the 90 days preceding a sale and who
has beneficially owned the shares proposed to be sold for at least two years
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from an
affiliate of ours, such person's holding period for the purpose of effecting a
sale under Rule 144 commences on the date of transfer from the affiliate.
Our directors and officers and stockholders holding an aggregate of
68,162,145 shares in the aggregate have agreed that they will not offer, sell
or agree to sell, directly or indirectly, or otherwise dispose of any shares of
common stock without the prior written consent of Bear, Stearns & Co. Inc. for
a period of 180 days from the date of this prospectus.
Any of our employees or consultants who purchased his or her shares pursuant
to a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of June 30, 1999, the holders of options exercisable for
approximately 819,850 shares of common stock will be eligible to sell their
shares on the expiration of the 180-day lockup period or subject in some cases
to vesting of such options. In addition, the holders of warrants exercisable
for approximately 1,053,325 shares of common stock will be eligible to sell
their shares pursuant to Rule 144 beginning 90 days after the date of this
prospectus.
62
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register all shares of common stock subject to outstanding
stock options and common stock issued or issuable under our stock plans. We
expect to file the registration statement covering shares offered pursuant to
the 1998 Stock Plan, the 1999 Stock Plan, the 1999 Non-Employee Director Plan
and the 1999 Employee Stock Purchase Plan within 180 days after the date of
this prospectus, permitting the resale of such shares by nonaffiliates in the
public market without restriction under the Securities Act.
We have agreed not to sell or otherwise dispose of any shares of common stock
during the 180-day period following the date of the prospectus, except that we
may issue, and grant options to purchase, shares of common stock under the 1998
Stock Plan, the 1999 Stock Plan, the 1999 Non-Employee Director Plan and the
1999 Employee Stock Purchase Plan. In addition, we may issue shares of common
stock in connection with any acquisition of, or strategic relationship with,
another company if the terms of issuance provide that such common stock shall
not be resold prior to the expiration of the 180-day period referenced in the
preceding sentence.
Following this offering, holders of 68,256,532 shares of outstanding common
stock will have demand registration rights with respect to their shares of
common stock, subject to the 180-day lock-up arrangement described above, to
require us to register their shares in any future registration of our
securities. See "Description of Securities -- Registration Rights."
63
UNDERWRITING
Underwriting Agreement
Subject to the terms and conditions set forth in an agreement among the
underwriters and us, each of the underwriters named below, through their
representatives Bear, Stearns & Co. Inc., Hambrecht & Quist LLC and Wit Capital
Corporation, has severally agreed to purchase from us the aggregate number of
shares of our common stock set forth opposite its name below:
Number
Underwriter of Shares
----------- ---------
Bear, Stearns & Co. Inc...........................................
Hambrecht & Quist LLC.............................................
Wit Capital Corporation...........................................
---
Total...........................................................
===
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions, including delivery of legal opinions by our
counsel, the delivery of a letter by our independent auditors and the accuracy
of the representations and warranties made by us in the underwriting agreement.
Under the underwriting agreement, the underwriters are obliged to purchase and
pay for all of the above shares of our common stock if any are purchased.
The underwriters, at the request of MotherNature.com, have reserved for sale
at the initial public offering price up to shares of our common stock by Wit
Capital in the offering. Purchases of the reserved shares are to be made
through an account at Wit Capital in accordance with Wit Capital's procedures
for opening an account and transacting in securities. Any reserved shares not
purchased by registered users of Wit Capital's Web site will be offered by the
underwriters on the same basis as other shares offered hereby. The prospectus
in electronic format is being made available on an Internet Web site maintained
by Wit Capital Corporation.
Public Offering Price
The underwriters propose to offer the shares of our common stock directly to
the public at the offering price set forth on the cover page of this prospectus
and at that price less a concession not in excess of $ per share of common
stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and those dealers may
reallow, concessions not in excess of $ per share of common stock to certain
other dealers. After this offering, the offering price, concessions and other
selling terms may be changed by the underwriters. Our common stock is offered
subject to receipt and acceptance by the underwriters and subject to other
conditions, including the right to reject orders in whole or in part. The
underwriters have informed us that the underwriters do not expect to confirm
sales of common stock to any accounts over which they exercise discretionary
authority.
64
The following table summarizes the per share and total public offering price
of the shares of common stock in the offering, the underwriting compensation to
be paid to the underwriters by us and the proceeds of the offering, before
expenses, to us. The information presented assumes either no exercise or full
exercise by the underwriters of their over-allotment option.
Total
-------------------
Without With
Over- Over-
Per Share allotment allotment
--------- --------- ---------
Public offering price........................
Underwriting discounts and commissions
payable by us...............................
Proceeds, before expenses, to us.............
The underwriting discount and commission per share is equal to the public
offering price per share of our common stock less the amount paid by the
underwriters to us per share of common stock.
We estimate total expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $ .
Over-Allotment Option to Purchase Additional Shares
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of additional shares of our common stock
exercisable at the offering price less the underwriting discounts and
commissions, each as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be obligated to purchase additional shares of common stock in
proportion to their respective purchase commitments as shown in the table set
forth above, subject to various conditions.
Indemnification and Contribution
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act or will contribute to payments that the underwriters may be
required to make in respect of those liabilities.
Lock-Up Agreements
Our directors and officers and stockholders holding 68,162,145 shares have
agreed that they will not offer, sell or agree to sell, directly or indirectly,
or otherwise dispose of any shares of common stock in the public market without
the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days
from the date of this prospectus.
In addition, we have agreed that for a period of 180 days from the date of
this prospectus, we will not, without the prior written consent of Bear,
Stearns & Co. Inc, offer, sell or otherwise dispose of any shares of common
stock, except that we may issue, and grant options to purchase, shares of
common stock under the 1998 Stock Plan, the 1999 Stock Plan, the 1999 Non-
Employee Director Plan and the 1999 Employee Stock Purchase Plan. In addition,
we may issue shares of common stock in connection with any acquisition of, or
strategic relationship with, another company if the terms of such issuance
provide that such common stock shall not be resold prior to the expiration of
the 180-day period referenced in the preceding sentence.
Nasdaq National Market Quotation
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the representatives of
65
the underwriters. Among the factors to be considered in those negotiations, the
primary factors will be our results of operations in recent periods, estimates
of our prospects and the industry in which we compete, an assessment of our
management, the general state of the securities markets at the time of this
offering and the prices of similar securities of generally comparable
companies. We have applied for approval for the quotation of our common stock
on the Nasdaq National Market, under the symbol "MTHR." We cannot assure you,
however, that an active or orderly trading market will develop for the common
stock or that the common stock will trade in the public market subsequent to
this offering at or above the initial offering price.
Stabilization, Syndicate Short Position and Penalty Bids
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock than we have actually sold to them. The underwriters may elect to
cover any such short position by purchasing shares of common stock in the open
market and may impose penalty bids, under which selling concessions allowed to
syndicate members or other broker-dealers participating in this offering are
reclaimed if shares of common stock previously distributed in this offering are
repurchased in connection with stabilization transactions or otherwise. The
effect of these transactions may be to stabilize or maintain the market price
at a level above that which might otherwise prevail in the open market. The
imposition of a penalty bid may also affect the price of the common stock to
the extent that it discourages resales thereof. No representation is made as to
the magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
Reserved Share Program
At our request, the underwriters have reserved for sale at the initial public
offering price up to shares of common stock to be sold in this offering for
sale to our directors, officers, employees, business associates, vendors and
related persons. Purchases of reserved shares are to be made through an account
at Bear, Stearns & Co. Inc. in accordance with Bear, Stearns & Co. Inc.'s
procedures for opening an account and transacting in securities. The number of
shares available for sale to the general public will be reduced to the extent
that any reserved shares are purchased. Any reserved shares not purchased by
our directors, officers, employees, business associates, vendors and related
persons will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.
Wit Capital Corporation
Wit Capital Corporation, a member of the National Association of Securities
Dealers, Inc., will participate in the offering as one of the underwriters. The
National Association of Securities Dealers, Inc. approved the membership of Wit
Capital on September 4, 1997. Since that time, Wit Capital has acted as an
underwriter, e-Manager or selected dealer in over 125 public offerings. Except
for its participation as a manager in this offering, Wit Capital has no
relationship with MotherNature.com, Inc., or any of its founders or significant
stockholders.
66
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Boston,
Massachusetts.
EXPERTS
Our financial statements and schedules as of December 31, 1998 and 1997, and
for the three years in the period ending December 31, 1998 included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including the exhibits, schedules and amendments
thereto) under the Securities Act with respect to the shares of common stock to
be sold in this offering. As permitted by the Securities Exchange Commission's
rules and regulations, this prospectus does not contain all the information set
forth in the registration statement. For further information regarding our
company and the shares of common stock to be sold in this offering, please
refer to the registration statement and the contracts, agreements and other
documents filed as exhibits to the registration statement.
You may read and copy all or any portion of the registration statement or any
other information that we file at the Securities Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by
writing to the Securities Exchange Commission. Please call the SEC at 1-800-
SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also
available to you on the Securities Exchange Commission's Web site
(http://www.SEC.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission.
We intend to furnish to our stockholders annual reports containing financial
statements audited by an independent public accounting firm.
67
MOTHERNATURE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants.................................. F-2
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(Unaudited).............................................................. F-3
Statements of Operations for the Years Ended December 31, 1996, 1997 and
1998 and for the Six Months Ended June 30, 1998 and 1999 (Unaudited)..... F-4
Statements of Shareholders' Equity (Deficit) for the Years Ended December
31, 1996, 1997 and 1998 and for the Six Months Ended June 30, 1999
(Unaudited).............................................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and
1998 and for the Six Months Ended June 30, 1998 and 1999 (Unaudited)..... F-6
Notes to Financial Statements............................................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of MotherNature.com, Inc.:
We have audited the accompanying balance sheets of MotherNature.com, Inc. (a
Delaware corporation) as of December 31, 1998 and 1997, and the related
statements of operations, shareholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MotherNature.com, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 17, 1999
F-2
MotherNature.com, Inc.
BALANCE SHEETS
December 31,
----------------------
Pro Forma
Shareholders' Equity
June 30, (Deficit) at June 30,
1997 1998 1999 1999
--------- ----------- ------------ ---------------------
(unaudited) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents........... $ 4,241 $11,243,943 $ 39,683,712
Accounts receivable.... 6,961 10,914 116,303
Subscription
receivable............ -- 1,600,000 --
Inventories............ 30,635 27,752 535,915
Prepaid expenses....... -- 172,348 173,749
--------- ----------- ------------
Total current
assets.............. 41,837 13,054,957 40,509,679
--------- ----------- ------------
Property and equipment,
net.................... 48,176 383,856 1,009,603
Other assets............ 293 22,800 85,721
--------- ----------- ------------
Total assets......... $ 90,306 $13,461,613 $ 41,605,003
========= =========== ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....... $ 75,504 $ 31,794 $ 280,973
Accrued expenses....... 4,481 681,356 2,015,326
Accrued compensation... 6,835 126,742 346,959
Other current
liabilities........... -- 2,250 --
Current portion of
notes payable......... 15,400 14,492 2,226
Current portion of
capital lease
obligations........... 5,056 4,416 1,049
--------- ----------- ------------
Total current
liabilities......... 107,276 861,050 2,646,533
Long-term portion of
notes payable.......... 44,517 13,142 16,595
Long-term portion of
capital lease
obligations............ 16,609 7,949 1,096
Shareholder advances
payable................ 13,804 -- --
Commitments and
contingencies (NOTE 8)
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock, $0.01
par value--
Authorized--
67,588,911 shares
Issued and
outstanding--
23,316,097 series A
shares, 23,019,375
series B-1 shares and
18,409,629 series C
shares; entitled to
$7,227,990,
$12,000,000 and
$41,950,022 in
liquidation,
respectively.......... -- 463,354 647,450 --
Common stock, $0 and
$0.01 par value in
1997 and 1998,
respectively, and
$0.01 par value in
1999--Authorized--
86,000,000 shares
Issued and
outstanding--
5,116,888 and
5,000,000 shares in
1998 and 1997,
respectively,
6,531,783 in 1999,
and 72,733,697 in
1999, pro forma....... 51,169 65,318 727,337
Additional paid-in
capital................ 148,313 18,915,846 60,552,108 60,537,539
Deferred compensation... -- -- (472,708) (472,708)
Accumulated deficit..... (240,213) (6,850,897) (21,851,389) (21,851,389)
--------- ----------- ------------ ------------
Total shareholders'
equity (deficit).... (91,900) 12,579,472 38,940,779 38,940,779
========= =========== ============ ============
Total liabilities and
shareholders'
equity.............. $ 90,306 $13,461,613 $ 41,605,003
========= =========== ============
The accompanying notes are an integral part of these financial statements.
F-3
MotherNature.com, Inc.
STATEMENTS OF OPERATIONS
Six Months Ended
Years Ended December 31, June 30,
--------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- ----------- --------- ------------
(unaudited)
Net sales............... $ 21,489 $ 193,064 $ 476,549 $ 254,239 $ 954,650
Cost of sales........... 10,681 71,484 417,998 148,905 844,330
--------- --------- ----------- --------- ------------
Gross profit.......... 10,808 121,580 58,551 105,334 110,320
Operating expenses:
Selling and
marketing............ 3,564 98,137 3,001,483 438,175 9,830,170
Product development... -- -- 2,135,570 8,672 3,101,587
General and
administrative....... 87,925 174,725 1,596,663 323,015 2,485,574
--------- --------- ----------- --------- ------------
Total operating
expenses........... 91,489 272,862 6,733,716 769,862 15,417,331
--------- --------- ----------- --------- ------------
Operating loss...... (80,681) (151,282) (6,675,165) (664,528) (15,307,011)
Interest income......... -- -- 110,113 12,508 379,853
Interest expense........ -- (8,250) (45,632) (9,371) (73,334)
--------- --------- ----------- --------- ------------
Net loss............ $ (80,681) $(159,532) $(6,610,684) $(661,391) $(15,000,492)
========= ========= =========== ========= ============
Basic and diluted net
loss per common share.. $ (0.05) $ (0.03) $ (1.32) $ (0.13) $ (2.69)
========= ========= =========== ========= ============
Pro forma basic and
diluted net loss per
common share........... $ (0.05) $ (0.03) $ (0.36) $ (0.09) $ (0.26)
========= ========= =========== ========= ============
Shares used to compute
basic and diluted net
loss per common share.. 1,469,593 4,855,479 5,017,613 5,000,000 5,566,430
========= ========= =========== ========= ============
Shares used to compute
pro forma basic and
diluted net loss per
common share........... 1,469,593 4,855,479 18,507,968 7,370,344 57,280,112
========= ========= =========== ========= ============
The accompanying notes are an integral part of these financial statements.
F-4
MotherNature.com, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND FOR THE SIX MONTHS ENDED JUNE
30, 1999 (UNAUDITED)
Preferred Stock Common Stock
------------------- ------------------- Additional Paid- Deferred Accumulated Total Shareholders'
Share Amount Shares Amount in Capital Compensation Deficit Equity (Deficit)
---------- -------- ---------- ------- ---------------- ------------- ------------ -------------------
BALANCE, December
31, 1995......... -- $ -- 1,000,000 $ -- $ 200 $ -- $ -- $ 200
---------- -------- ---------- ------- ----------- --------- ------------ -----------
Issuance of
common stock for
services
rendered........ -- -- 3,750,000 -- 75,000 -- -- 75,000
Net loss........ -- -- -- -- -- -- (80,681) (80,681)
---------- -------- ---------- ------- ----------- --------- ------------ -----------
BALANCE, December
31, 1996......... -- -- 4,750,000 -- 75,200 -- (80,681) (5,481)
Issuance of
common stock.... -- -- 100,000 -- 25,000 -- -- 25,000
Issuance of
common stock in
connection with
a note.......... -- -- 75,000 -- 18,750 -- -- 18,750
Issuance of
common stock for
services
rendered........ -- -- 75,000 -- 18,750 -- -- 18,750
Deemed capital
contribution.... -- -- -- -- 10,613 -- -- 10,613
Net loss........ -- -- -- -- -- -- (159,532) (159,532)
---------- -------- ---------- ------- ----------- --------- ------------ -----------
BALANCE, December
31, 1997......... -- -- 5,000,000 -- 148,313 -- (240,213) (91,900)
Retirement of
common stock in
connection with
reincorporation.. -- -- (5,000,000) -- (148,313) -- -- (148,313)
Issuance of
common stock in
connection with
reincorporation.. -- -- 5,000,000 50,000 98,313 -- -- 148,313
Conversion of
promissory notes
into Series A
convertible
preferred
stock........... 1,290,323 12,903 -- -- 387,097 -- -- 400,000
Issuance of
Series A
convertible
preferred stock,
net of issuance
costs........... 21,854,839 218,548 -- -- 6,516,452 -- -- 6,735,000
Exercise of
common stock
options......... -- -- 116,888 1,169 2,338 -- -- 3,507
Conversion of
loans and
advances into
Series A
convertible
preferred
stock........... 170,935 1,709 -- -- 51,281 -- -- 52,990
Compensation
expense related
to common stock
options......... -- -- -- -- 24,855 -- -- 24,855
Issuance of
detachable
warrants for
Series A
convertible
preferred
stock........... -- -- -- -- 106,065 -- -- 106,065
Issuance of
Series B-1
convertible
preferred stock,
net of issuance
costs........... 23,019,375 230,194 -- -- 11,729,445 -- -- 11,959,639
Net loss........ -- -- -- -- -- -- (6,610,684) (6,610,684)
---------- -------- ---------- ------- ----------- --------- ------------ -----------
BALANCE, December
31, 1998......... 46,335,472 463,354 5,116,888 51,169 18,915,846 -- (6,850,897) 12,579,472
Additional costs
of Series B-1
convertible
preferred stock
issuance........ -- -- -- -- (21,261) -- -- (21,261)
Exercise of
common stock
options......... -- -- 1,414,895 14,149 28,298 -- -- 42,447
Issuance of
Series C
convertible
preferred stock,
net of issuance
costs........... 18,409,629 184,096 -- -- 40,854,390 -- -- 41,038,486
Compensation
expense related
to common stock
options and
warrants........ -- -- -- -- 224,521 -- -- 224,521
Deferred
compensation.... -- -- -- -- 550,314 (550,314) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 77,606 -- 77,606
Net loss........ -- -- -- -- -- -- (15,000,492) (15,000,492)
---------- -------- ---------- ------- ----------- --------- ------------ -----------
BALANCE, June 30,
1999
(unaudited)...... 64,745,101 $647,450 6,531,783 $65,318 $60,552,108 $(472,708) $(21,851,389) $38,940,779
========== ======== ========== ======= =========== ========= ============ ===========
The accompanying notes are an integral part of these financial statements.
F-5
MotherNature.com, Inc.
STATEMENTS OF CASH FLOWS
Six Months Ended
Years Ended December 31, June 30,
-------------------------------- ------------------------
1996 1997 1998 1998 1999
-------- --------- ----------- ---------- ------------
(unaudited)
OPERATING ACTIVITIES:
Net loss............... $(80,681) $(159,532) $(6,610,684) $ (661,391) $(15,000,492)
Adjustments to
reconcile net loss to
net cash used in
operating activities-
Depreciation and
amortization......... 1,364 9,039 850,112 24,800 219,249
Common stock issued
for services
rendered............. 75,000 18,750 -- -- --
Loss on disposal of
equipment............ -- -- 33,265 -- 7,994
Compensation expense
relating to common
stock options and
warrants............. -- -- 24,855 -- 224,521
Amortization of
deferred
compensation......... -- -- -- -- 77,606
Amortization of debt
discount.............. -- 4,228 18,045 -- 3,452
Changes in operating
assets and
liabilities-
Accounts receivable... -- (5,861) (3,953) (14,383) (105,389)
Inventories........... (799) (29,836) 2,883 (27,888) (508,163)
Prepaid expenses...... (734) -- (41,283) -- (16,401)
Other assets.......... -- -- (22,507) (14,759) (62,921)
Accounts payable...... 3,094 72,410 (43,710) 65,767 249,179
Accrued expenses...... 75 4,406 678,950 230 1,333,970
Accrued
compensation......... -- 6,835 119,907 18,705 220,217
Other current
liabilities.......... -- -- 2,250 -- (2,250)
-------- --------- ----------- ---------- ------------
Net cash used in
operating
activities......... (2,681) (79,561) (4,991,870) (608,919) (13,359,428)
-------- --------- ----------- ---------- ------------
INVESTING ACTIVITIES:
Purchases of property
and equipment........ (5,500) (28,391) (1,214,057) (876,483) (837,990)
-------- --------- ----------- ---------- ------------
FINANCING ACTIVITIES:
Cash paid to secure
financing............ -- -- (30,000) -- --
Repayments of capital
lease obligations.... -- (2,582) (9,300) -- (10,220)
Proceeds from
shareholder advances
payable.............. 4,382 8,322 -- -- --
Proceeds from
(repayment of) notes
payable.............. 4,650 80,402 (13,217) 13,936 (12,265)
Proceeds from Secured
Convertible
Promissory Note
Financing............ -- -- 400,000 -- --
Proceeds from Series
A Preferred
Financing, net of
issuance costs....... -- -- 6,735,000 6,650,000 --
Proceeds from Series
B-1 Preferred
Financing, net of
issuance costs....... -- -- 10,359,639 -- 1,578,739
Proceeds from Series
C Preferred
Financing, net of
issuance costs....... -- -- -- -- 41,038,486
Proceeds from
exercise of common
stock options........ -- -- 3,507 -- 42,447
Proceeds from
issuance of common
stock................ -- 25,000 -- -- --
-------- --------- ----------- ---------- ------------
Net cash provided by
financing
activities......... 9,032 111,142 17,445,629 6,663,936 42,637,187
-------- --------- ----------- ---------- ------------
Net increase in cash
and cash
equivalents........ 851 3,190 11,239,702 5,178,534 28,439,769
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 200 1,051 4,241 4,241 11,243,943
-------- --------- ----------- ---------- ------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 1,051 $ 4,241 $11,243,943 $5,182,775 $ 39,683,712
======== ========= =========== ========== ============
SUPPLEMENTAL DISCLOSURE
OF NONCASH FINANCING
ACTIVITY:
Conversion of loans
and advances into
preferred stock...... $ -- $ -- $ 52,990 $ -- $ --
======== ========= =========== ========== ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
year for interest.... $ -- $ 740 $ 19,030 $ 5,315 $ 1,599
======== ========= =========== ========== ============
Cash paid during the
year for taxes....... $ -- $ -- $ -- $ -- $ 29,500
======== ========= =========== ========== ============
The accompanying notes are an integral part of these financial statements.
F-6
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
(1) Summary of Significant Accounting Policies
Description of Business
MotherNature.com, Inc. (MotherNature.com or the Company), formerly Mother
Nature's General Store, Inc., is a leading online retail store and information
site for vitamins, supplements, minerals and other natural and healthy living
products. The Company currently offers approximately 13,000 products on its
site and can special order additional products through its supplier
relationships. MotherNature.com also provides educational and authoritative
news and information about its products and healthy living in general.
The Company, originally incorporated in the Commonwealth of Pennsylvania in
December 1995, reincorporated in the State of Delaware in June 1998 prior to
its first round of financing. Since its inception, the Company has incurred
significant losses and as of June 30, 1999 had an accumulated deficit of
approximately $21.9 million. The Company has incurred costs to develop and
enhance its technology, to create, introduce and enhance its Web site, to
establish marketing and distribution relationships and to build its
administrative organization. The Company intends to continue to invest heavily
in marketing and promotion, development of its Web site, technology and
administrative organization. As a result, the Company believes that it will
incur substantial operating losses for the foreseeable future. There can be no
assurance that the Company will be able to generate sufficient revenues to
achieve or sustain profitability in the future.
The Company has been funded principally from the issuance of preferred stock
in June/July 1998, December 1998/January 1999 and May 1999 (the Series A, B-1,
and C Preferred Financings) in the amounts of $7.2 million, $12.0 million and
$42.0 million, respectively (see Note 7).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
reported amounts of net sales and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are carried at cost plus accrued interest, which
approximates fair value. The Company considers all highly liquid investments
with an original maturity date of three months or less to be cash equivalents.
Revenue Recognition
Net sales, which consist primarily of vitamins, supplements, minerals, and
other natural and healthy living products sold via the Internet, include
outbound shipping and handling charges incurred by the customer and are
recognized at the time of shipment. The Company generally does not extend
credit to customers, except through third-party credit cards. Credit under
these accounts is extended by third parties, and accordingly, the Company bears
no financial risk under these agreements except in the case of fraud. The
Company's agreements with third-party credit companies provide for the
electronic processing of credit approvals and the electronic submission of
transactions. Upon the submission of these transactions to the credit card
companies, payment is transmitted to the Company's bank account. Accordingly,
the Company records these amounts as cash upon the electronic submission of the
transaction to the appropriate processing agency.
F-7
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
Inventories
Inventories are stated at the lower of cost or market and are valued using
the first-in, first-out (FIFO) method. Cost of sales includes purchased
merchandise and outbound freight incurred by the Company.
Selling and Marketing Expense
Selling and marketing expense includes advertising and promotional
expenditures, fulfillment facility expenses and payroll and related expenses
for personnel engaged in marketing, fulfillment and customer service
operations. Advertising expenditures are expensed as incurred as such efforts
historically have not met the direct-response criteria required for
capitalization. MotherNature.com advertising to date has related primarily to
building brand awareness, including traditional media advertising such as
radio, print and billboards and sponsorship of special events and promotions.
Total advertising costs for the years ended December 31, 1996, 1997 and 1998,
and for the six months ended June 30, 1998 and 1999, were $0, $257 and
$1,900,561, and $119,391 and $7,882,311, respectively.
Product Development Expense
Product development expense includes payroll and related expenses for
merchandising, Web site development, Web content and design and information
technology personnel and related infrastructure.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, requires that stock awards granted subsequent to
January 1, 1995 be recognized as compensation expense based on their fair value
at the date of grant. Alternatively, a company may use Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and
disclose pro forma income amounts that would have resulted from recognizing
such awards at their fair value. The Company has elected to account for stock-
based compensation expense under APB No. 25 and make the required pro forma
disclosures for compensation (see Note 7).
Income Taxes
The Company records income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. Under SFAS No. 109, the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using enacted tax
rates. A valuation allowance has been established against the deferred tax
assets because the Company believes it is more likely than not that the benefit
will not be realized.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes payable, capital lease obligations, and accounts
payable, and are carried at cost or carrying value. These amounts were not
materially different from their fair values.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted
number of common shares outstanding for all periods presented. Diluted net loss
per share reflects the dilutive effect of shares under
F-8
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
option plans, warrants and convertible preferred stock. Potentially dilutive
shares outstanding during the period have been excluded from diluted net loss
per share because their effect would be anti-dilutive. Pro forma net loss per
share is computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic conversion of the
Company's convertible preferred stock into shares of the Company's common
stock, effective upon the closing of the Company's initial public offering as
if such conversion occurred on June 10, 1998, or at the date of the original
issuance, if later.
The weighted average common shares outstanding, the dilutive effect of
outstanding stock options and warrants, the pro forma weighted average number
of common shares outstanding, and the shares under option plans, warrants and
convertible preferred stock which were antidilutive for the periods ended
December 31, 1996, 1997 and 1998 and June 30, 1998 and 1999 are as follows:
Six Months Ended
Years Ended December 31, June 30,
------------------------------ ---------------------
1996 1997 1998 1998 1999
--------- --------- ---------- ---------- ----------
Weighted average common
shares used in basic EPS
calculation.............. 1,469,593 4,855,479 5,017,613 5,000,000 5,566,430
Additional weighted
average common shares
used in diluted EPS
calculation.............. -- -- -- -- --
Weighted average
convertible preferred
shares assumed to convert
to common shares......... -- -- 13,490,355 2,370,344 51,713,682
--------- --------- ---------- ---------- ----------
Weighted average common
shares used in pro forma
basic and diluted EPS
calculations............. 1,469,593 4,855,479 18,507,968 7,370,344 57,280,112
========= ========= ========== ========== ==========
Shares under option plans,
warrants and convertible
preferred stock excluded
in computation of diluted
earnings per share due to
antidilutive effects..... -- -- 56,292,447 28,693,722 75,037,488
========= ========= ========== ========== ==========
Unaudited Interim Information
The financial information as of June 30, 1999, and for the six months ended
June 30, 1998 and 1999 is unaudited. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of such period.
The interim results are not necessarily indicative of results for the year.
Comprehensive Income
Comprehensive income is defined as the change in net assets of a business
enterprise during a period from transactions generated from nonowner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company had no material
other comprehensive income in any of the periods presented.
Segment Information
The Company complies with the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company identifies its
operating segments based on business activities and management responsibility.
The Company operates in a single business segment selling vitamins,
supplements, minerals and other natural and healthy living products online.
F-9
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, requiring computer software
costs associated with internal-use software to be expensed as incurred until
certain capitalization criteria are met. The Company adopted SOP 98-1 for the
year ended December 31, 1998. Adoption of this statement did not have a
material impact on the Company's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on Costs of Start-Up
Activities, requiring all costs associated with preopening, preoperating and
organization activities to be expensed as incurred. The Company has adopted the
statement and has expensed all costs of start up activities.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. As
issued, SFAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, with earlier application encouraged. In May
1999, the FASB delayed the effective date of SFAS 133 for one year, to fiscal
years beginning after June 15, 2000. The Company does not currently nor does it
intend in the future to issue derivative instruments and therefore does not
expect that the adoption of SFAS 133 will have any impact on its financial
position or results of operations.
(2) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Expenditures that significantly improve or extend the life of an asset are
capitalized. Maintenance and repairs are charged to expense when incurred.
Depreciation of property and equipment is calculated on the straight-line basis
over an estimated useful life of two to five years. Leasehold improvements and
equipment under capital leases are amortized over the shorter of the related
lease term or the useful life of the asset.
Property and equipment consist of the following:
December 31,
-----------------
June 30,
1997 1998 1999
------- -------- ----------
Computer equipment and software............. $20,831 $419,489 $1,043,795
Office equipment and furniture.............. 13,009 27,910 157,106
Equipment under capital lease............... 24,298 18,413 5,924
Leasehold improvements...................... -- 16,800 96,317
------- -------- ----------
58,138 482,612 1,303,142
Less -- Accumulated depreciation and
amortization............................... (9,962) (98,756) (293,539)
------- -------- ----------
$48,176 $383,856 $1,009,603
======= ======== ==========
For the years ended December 31, 1996, 1997 and 1998, depreciation expense
was $1,217, $8,745 and $845,112, respectively. For the six months ended June
30, 1998 and 1999, depreciation expense was $24,800 and $204,249, respectively.
The net book value of property and equipment under capital leases was $21,829
and $11,748 at December 31, 1997 and 1998, respectively, and $18,371 and $1,811
at June 30, 1998 and 1999, respectively.
F-10
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
(3) Accrued Expenses
Accrued expenses consist of the following:
December 31,
--------------- June 30,
1997 1998 1999
------ -------- ----------
Accrued professional services.................... $1,200 $236,757 $ 216,250
Accrued marketing................................ -- 243,299 1,084,642
Other accrued expenses........................... 3,281 201,300 714,434
------ -------- ----------
$4,481 $681,356 $2,015,326
====== ======== ==========
(4) Employee Benefit Plans
The Company has a savings plan (the 401(k) Plan), which qualifies as a
defined contribution arrangement under Section 401(a), 401(k) and 501(a) of the
Internal Revenue Code. Under the 401(k) Plan, participating employees may defer
a percentage (not to exceed 15%) of their eligible pretax earnings up to the
Internal Revenue Service's annual contribution limit. All employees on the
payroll of the Company are eligible to participate in the 401(k) Plan. The
Company will determine its contributions, if any, based on its current profits
and/or retained earnings; however, no contributions have been made since the
inception of the 401(k) Plan.
(5) Debt
In December 1998, the Company entered into a loan and security agreement (the
Loan Agreement) with a bank (the Bank) to borrow up to $500,000 under a
revolving credit facility (the Credit Facility) and/or a 36-month equipment
term loan facility (the Equipment Loan). The interest rate per year on the
Credit Facility is equal to the Bank's prime rate for the initial six months of
the Credit Facility, and the Bank's prime rate plus 25 basis points thereafter.
The interest rate per year on the Equipment Loan is equal to the Bank's prime
rate plus 75 basis points. The Bank's prime rate as of June 30, 1999 was 7.75%.
On the first advance date of the Equipment Loan, the Company may, at its
option, elect a fixed interest rate on the Equipment Loan, at a rate determined
by the Bank, which shall thereafter be applicable to all advances under the
Equipment Loan. After the last advance date, the unpaid principal balance of
the Equipment Loan is payable in 30 monthly installments of principal plus
interest. As security for the loan, the Bank has a perfected security interest
in all of the Company's personal property and in all proceeds and products
thereof. To date, the Company has used the Credit Facility to fund corporate
credit card expenses which under the terms of the Credit Facility may not
exceed $175,000 at any time and are required to be repaid on a monthly basis.
In December 1998, the Company entered into a subordinated loan and security
agreement (the Subordinated Loan Agreement) with a commercial lender (the
Commercial Lender). The Subordinated Loan Agreement allows the Company to
borrow up to $3 million, during the one-year period beginning December 1998, in
minimum installments of $250,000 each, at an interest rate of prime plus 50
basis points per year, fixed at the time of the advance. The Commercial
Lender's prime rate as of June 30, 1999 was 7.75%. Interest on each advance is
due and payable in 12 equal monthly installments, followed by 24 equal monthly
installments of principal and interest. As a condition to entering into the
Subordinated Loan Agreement, the Commercial Lender required the Company to pay
a commitment fee equal to 1% of the total amount available for borrowing, which
the Company has capitalized in the accompanying balance sheet. As security for
the loan, the Commercial Lender has a perfected secondary security interest in
the Company's personal property and in all proceeds and products thereof. In
addition, the Commercial Lender may convert, on one occasion only, up
F-11
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
to 30% of the original aggregate principal amount of all advances under the
Subordinated Loan Agreement into shares of common stock at a price of $0.50 per
share. To date, the Company has had no outstanding borrowings under the
Subordinated Loan Agreement. In connection with the Subordinated Loan
Agreement, the Company issued warrants to the Commercial Lender to purchase
477,360 shares of common stock with an exercise price of approximately $0.5028
per share. These warrants are exercisable until the earlier of the seventh
anniversary of the date of the Subordinated Loan Agreement or the third
anniversary of the effective date of the Company's initial public offering.
These warrants were valued using the Black-Scholes option-pricing model (see
Note 7).
In addition, the Company also entered into a master lease agreement (the
Lease Agreement) with the Commercial Lender. Pursuant to the Lease Agreement,
the Commercial Lender has agreed to lease to the Company certain equipment
specifically approved by the Commercial Lender, during the one-year period
beginning December 1998, up to an aggregate purchase price of $300,000. The
term of the lease is 48 months, and the Company will have the option at the
expiration of the initial term of the equipment lease to purchase all of the
equipment for a purchase price not to exceed 15% of the equipment cost. As of
December 31, 1998, and as of June 30, 1999, the Company had no outstanding
borrowings under the Lease Agreement. Borrowings under the Lease Agreement will
be accounted for as capital leases when such borrowings occur. In connection
with the Lease Agreement, the Company issued warrants to purchase 17,901 shares
of common stock with an exercise price of approximately $0.5028 per share.
These warrants are exercisable until the earlier of the seventh anniversary of
the date of the Lease Agreement or the third anniversary of the effective date
of the Company's initial public offering. These warrants were valued using the
Black-Scholes option-pricing model (see Note 7).
(6) Note Payable
In 1997, the Company borrowed $35,000 from a vendor in the form of a
promissory note (the Note), payable in monthly installments of $2,000 at an
interest rate of 10% per year, commencing January 1, 1999. The Company also
issued a total of 150,000 shares of common stock to the vendor, 75,000 of which
related to the Note. The estimated value of the common stock was recorded as an
original issue discount on the Note and will be amortized over the term of the
Note. At December 31, 1997 and 1998, and at June 30, 1999, the balance on the
Note, net of the original issue discount, was $19,860 and $27,634, and $18,821,
respectively.
(7) Shareholders' Equity
Reincorporation and Authorized Capital
Prior to June 1998, the Company was incorporated in the Commonwealth of
Pennsylvania with authorized capital of 10,000,000 shares of no par value
common stock. In June 1998, the Company reincorporated in the state of Delaware
with authorized capital of 40,000,000 shares of $0.01 par value common stock
and 47,490,000 shares of $0.01 par value preferred stock. In May 1999, the
Company increased its authorized common stock to 86,000,000 shares and
increased its authorized preferred stock to 67,588,911 shares.
Preferred Stock
The Company has authorized Series A Preferred, Series B-1 Preferred, Series
B-2 Preferred and Series C Preferred. In the event of a public offering of the
Company's equity securities effective on or before December 31, 1999 and
resulting in gross proceeds to the Company of $20,000,000 or greater, each
outstanding share of Series A Preferred, Series B-1 Preferred and Series B-2
Preferred will automatically convert into one share of common stock, and under
the circumstances described in Note 12, the Series C Preferred will
automatically convert into approximately 1.08 shares of common stock.
F-12
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
In June and July 1998, the Company issued 21,854,839 shares of Series A
Preferred at a price of $0.31 per share in conjunction with the Series A
Preferred Financing and 1,290,323 shares of Series A Preferred in conjunction
with the conversion of $400,000 in principal amount of secured convertible
notes. Additionally, in July and November 1998, the Company issued 170,935
shares of Series A Preferred in consideration for the forgiveness of
shareholder advances and loans payable. The Series A Preferred is convertible
at the option of the holder, at any time, at a rate of one share of common
stock for one share of Series A Preferred, subject to certain antidilution
adjustments.
In December 1998 and January 1999, the Company issued 19,950,125 and
3,069,250 shares of Series B-1 Preferred, respectively, at a price of $0.5213
per share in conjunction with the Series B-1 Preferred Financing. The shares
issued in January 1999 were issued pursuant to a binding agreement entered into
in December 1998 and have been included in the total shares of Series B-1
Preferred in the accompanying financial statements at December 31, 1998. The
Series B-1 Preferred is convertible at the option of the holder, at any time,
at a rate of one share of common stock for one share of Series B-1 Preferred,
subject to certain antidilution adjustments.
In May 1999, the Company issued 18,409,629 shares of Series C Preferred at a
price of $2.2787 per share in conjunction with the Series C Preferred
Financing. The Series C Preferred is convertible at the option of the holder,
at any time, at a rate of one share of common stock for one share of Series C
Preferred, subject to certain antidilution adjustments.
Voting
Each share of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred
and Series C Preferred entitles the holder to the number of votes per share as
equals the number of shares of common stock into which each share of preferred
stock is convertible.
Dividends
The holders of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred
and Series C Preferred are entitled to receive, when and if declared by the
Board of Directors, quarterly dividends at the rate of $0.0186, $0.0313, $0.03
and $0.1367 per share, respectively. The preferred dividends are not
cumulative. For the year ended December 31, 1998, and for the six months ended
June 30, 1999, the Company did not declare any dividends.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred
and Series C Preferred are entitled to receive, in preference to the holders of
common stock, any distribution of assets of the Company in an amount per share
equal to $0.31, $0.5213, $0.50, and $2.2787 respectively, plus any declared but
unpaid dividends.
Common Stock
Each share of common stock entitles the holder to one vote per share. In
April 1998, the Company effected a 5,000-for-1 stock split in the form of a
stock dividend. All references in the financial statements to the number of
shares and to per share amounts have been retroactively restated to reflect
these changes.
F-13
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
Warrants
In April 1998, the Company issued warrants to purchase an aggregate of
300,000 shares of common stock at an exercise price of $0.01 per share, fair
market value of common stock at date of grant, to a founding employee of the
Company and to a non-employee, early contributor to the Company. These warrants
expire on April 29, 2003. Using the Black-Scholes option-pricing model, the
warrants issued to the non-employee were valued at $50, which was recorded as
expense in 1998.
In May 1998, the Company issued warrants, in connection with a $400,000
secured convertible note financing (the Secured Convertible Note Financing) to
purchase 258,064 shares of common stock at an exercise price of $0.31 per
share, fair market value of preferred stock at date of grant. These warrants
expire on May 1, 2006.
As consideration for the Subordinated Loan Agreement and the Lease Agreement,
the Commercial Lender received warrants to purchase 495,261 shares of common
stock at a price of approximately $0.5028 per share, fair market value of
preferred stock at date of grant (see Note 5). Using the Black-Scholes option-
pricing model, the warrants were valued at $106,065 and were included in
prepaid expenses, net of amortization, on the balance sheet at December 31,
1998. The expense will be amortized over the term of the Subordinated Loan
Agreement and the Lease Agreement.
In May 1999, the Company issued warrants, in connection with the services
provided by an investment bank (the Investment Bank) for the Series C Preferred
Financing, to purchase 137,140 shares of common stock at an exercise price of
$2.7344 per share, subject to adjustment of the conversion price of the Series
C Preferred (see Note 12). These warrants expire on May 12, 2004. Using the
Black-Scholes option-pricing model, the warrants issued to the Investment Bank
were valued at $200,438, which was recorded as a reduction to the Series C
Preferred Financing proceeds received in 1999.
In June 1999, the Company issued warrants, in connection with a lease
agreement entered into with a landlord (the Landlord), to purchase an aggregate
of up to 6,000 shares of the Company's common stock at an exercise price per
share of $2.50, fair market value of the common stock at the date of grant. The
warrants are exercisable at any time prior to June 22, 2002. Using the Black-
Scholes option-pricing model, the warrants issued to the landlord were valued
at $9,665, which was recorded as expense in 1999.
Stock Options
In June 1998, the Company adopted the MotherNature.com, Inc. 1998 Stock Plan,
as amended in June 1998 (the Plan), which authorizes the Company to grant
options to purchase up to an aggregate of 6,938,000 shares of common stock.
Later in June 1998, the Plan was amended to increase the aggregate number of
shares of common stock issuable under the Plan to 9,512,000, and in May 1999,
the Plan was amended again to increase the number of shares issuable under the
Plan to 12,655,219. Under the Plan, incentive and nonqualified stock options,
awards of stock and opportunities to make direct purchases of stock may be
granted to employees, officers, directors, independent contractors and
consultants. Generally, options are granted by the Company's Board of Directors
or the Compensation Committee of the Board of Directors. Each outstanding
option granted under the Plan expires at various dates, not to exceed 10 years
from the date of grant, and becomes exercisable in varying installments as
determined by the Board of Directors, or the Compensation Committee of the
Board of Directors, at the date of grant. Effective July 1999, the Board of
Directors terminated the Plan, and adopted the 1999 Stock Plan and 1999 Non-
Employee Director Stock Plan (see Note 13).
F-14
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
In 1998, and for the six months ended June 30, 1999, the Company granted
nonqualified stock options to purchase a total of 29,000 shares and 254,500
shares, respectively, of common stock to non-employees under the Plan with
immediate vesting. As prescribed by SFAS No. 123, the options were valued,
using the Black-Scholes option-pricing model, at $1,305, and $211,538,
respectively, which was recorded as expense in the Company's Statement of
Operations. In addition, in 1998 the Company granted nonqualified stock options
to purchase a total of 2,200,000 shares of common stock to non-employees under
the Plan with a three-year vesting period as follows: 34% immediately and an
additional 22% after years one, two and three. Using the Black-Scholes option-
pricing model, these options were valued at $60,000 and will be amortized to
expense over the vesting period. For the year ended December 31, 1998 and the
six months ended June 30, 1999, $23,500 and $3,318, respectively, was recorded
as expense. During 1999, all the unvested options related to these grants were
cancelled.
The following table summarizes the Company's stock option activity:
Weighted
Average
Number of Exercise
Shares Price
---------- --------
Balance, December 31, 1997.............................. -- $ --
Options granted....................................... 10,205,694 0.04
Options canceled...................................... (1,185,156) 0.03
Options exercised..................................... (116,888) 0.03
----------
Balance, December 31, 1998.............................. 8,903,650 0.04
Options granted....................................... 2,299,600 1.09
Options canceled...................................... (2,160,108) 0.07
Options exercised..................................... (1,414,895) 0.03
---------- -----
Balance, June 30, 1999.................................. 7,628,247 $0.35
========== =====
Options granted during the period ended June 30, 1999 resulted in a total
deferred compensation amount of $550,314. This amount will be recognized as
compensation expense over the vesting period. During the six months ended June
30, 1999, such compensation expense amounted to $77,606. At December 31, 1998
and June 30, 1999, 491,462 and 3,495,189 shares of common stock, respectively,
were available for future grant under the Plan.
The following table summarizes information about options outstanding and
exercisable at June 30, 1999:
Weighted
Average
Remaining Weighted Weighted
Exercise Options Contractual Average Options Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
- -------- ----------- ----------- -------------- ----------- --------------
$0.03........ 4,023,307 9.04 years $0.03 504,750 $0.03
$0.10........ 1,677,340 9.49 years $0.10 34,000 $0.10
$0.40........ 739,000 9.56 years $0.40 100,000 $0.40
$0.70........ 73,600 9.59 years $0.70 26,600 $0.70
$1.00........ 338,000 9.73 years $1.00 -- $ --
$2.00........ 488,000 9.87 years $2.00 16,000 $2.00
$2.50........ 289,000 9.98 years $2.50 138,500 $2.50
--------- -------
$0.03-2.50... 7,628,247 9.31 years $0.35 819,850 $0.56
========= =======
F-15
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
If the Company had accounted for the Plan and for the warrants issued in
connection with the Secured Convertible Note Financing in accordance with SFAS
No. 123, the Company's net loss and net loss per share would have been
increased to the following pro forma amounts:
Six Months Ended
Years Ended December 31, June 30,
-------------------------------- -----------------------
1996 1997 1998 1998 1999
-------- --------- ----------- --------- ------------
Net loss, as reported... $(80,681) $(159,532) $(6,610,684) $(661,391) $(15,000,492)
Net loss, pro forma..... $(80,681) $(159,532) $(6,690,472) $(681,268) $(15,215,662)
Basic and diluted net
loss per common share,
as reported............ $ (0.05) $ (0.03) $ (1.32) $ (0.13) $ (2.69)
Basic and diluted net
loss per common share,
pro forma.............. $ (0.05) $ (0.03) $ (1.33) $ (0.14) $ (2.73)
Basic and diluted net
loss per common share,
pro forma, for
convertible preferred
shares................. $ (0.05) $ (0.03) $ (0.36) $ (0.09) $ (0.27)
The fair value of each option grant and of the warrants issued in connection
with the Secured Convertible Note Financing was calculated using the Black-
Scholes option-pricing model. For the year ended December 31, 1998 and the six
months ended June 30, 1999 the weighted average value was calculated using an
expected life of approximately four years (two years for non-qualified stock
options), a dividend yield of 0%, a risk-free interest rate of 5.40% and a
volatility of 100%. The weighted-average fair value of options granted during
1998 and for the six months ended June 30, 1999, using the Black-Scholes
option-pricing model, was $0.029 and $0.7452, respectively.
(8) Commitments and Contingencies
The Company currently leases office and distribution center facilities and
fixed assets under noncancelable operating and capital leases. Rental expense
under operating lease agreements for 1996, 1997 and 1998 was $0, $4,000 and
$81,400, respectively. Rental expense under operating lease agreements for the
six months ended June 30, 1998 and 1999 was $14,800 and $117,532, respectively.
Future minimum commitments as of December 31, 1998 are as follows:
Operating
Capital Leases and
Leases Advertising
------- -----------
Year ending December 31,
1999..................................................... $5,297 $596,090
2000..................................................... 4,175 98,750
2001..................................................... 3,053 52,500
2002..................................................... 1,527 --
2003..................................................... -- --
Thereafter............................................... -- --
------ --------
Total minimum lease and advertising payments............. 14,052 $747,340
------ --------
Less--Interest........................................... 1,687
------
Present value of net minimum lease payments.............. 12,365
Less--Current portion.................................... 4,416
------
Long-term capital lease obligation....................... $7,949
======
F-16
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
As of June 30, 1999, the Company had media purchase commitments, which
consist of off-line and online advertising, totalling approximately $2,800,000.
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
for contingent liabilities when it is probable that future expenditures will be
made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect in the financial position or results of
operations of the Company.
(9) Income Taxes
Due to losses incurred since inception of the Company, there is no income tax
provision or payable in any of the periods presented. As of December 31, 1998,
the Company had approximately $6.3 million of federal tax net operating loss
carryforwards, which begin to expire in 2011. As of June 30, 1999, the Company
had approximately $20.6 million of federal tax net operating loss
carryforwards, which begin to expire in 2011. The net deferred tax asset of the
Company related to the net operating losses is approximately $141,000 and
$2.5 million, and $8.3 million, as of December 31, 1997 and 1998, and June 30,
1999, respectively. A full valuation allowance was established for the deferred
tax asset, as realization of the tax benefit is not assured.
Significant items giving rise to deferred tax assets and deferred tax
liabilities at December 31, 1997, 1998, and June 30, 1999, are as follows:
December 31,
----------------------
June 30,
1997 1998 1999
--------- ----------- -----------
Deferred tax assets--
Nondeductible accruals................. $ -- $ 162,374 $ 375,989
Other deferred tax assets.............. 100 (1,553) 57,906
Net operating loss carryforwards....... 140,637 2,526,000 8,287,307
--------- ----------- -----------
Total deferred tax assets............ 140,737 2,686,821 8,721,202
Deferred tax liabilities................. -- (5,708) (3,402)
Valuation allowance...................... (140,737) (2,681,113) (8,717,800)
--------- ----------- -----------
Total net deferred tax assets
(liabilities)........................... $ -- $ -- $ --
========= =========== ===========
In addition, the Company's utilization of its net operating loss
carryforwards may be limited pursuant to the Tax Reform Act of 1986, due to
cumulative changes in ownership in excess of 50%, as defined.
(10) Significant Suppliers
The Company purchases a majority of its product from two suppliers. These
suppliers accounted for approximately 51% of the Company's inventory purchases
in 1998 and 75% for the six months ended June 30, 1999. One of these suppliers
accounted for 44% of the Company's inventory purchases in 1997. The Company has
no long-term contracts or arrangements with any of its vendors that guarantee
the availability of merchandise, the continuation of particular payment terms
or the extension of credit limits. There can be no assurance that the Company's
current vendors will continue to sell merchandise to the Company on current
terms or that the Company will be able to establish new or extend current
vendor relationships to ensure acquisition of merchandise in a timely and
efficient manner and on acceptable credit terms.
F-17
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
(11) Related Party Transactions
The Company leases office space from a shareholder under a noncancelable
operating lease. For the years ended December 31, 1996, 1997 and 1998, rent
expense on this lease was $0, $4,000 and $41,400, respectively. For the six
months ended June 30, 1998 and 1999, rent expense on this lease was $14,800 and
$21,800, respectively. As of December 31, 1998 and June 30, 1999, the remaining
commitment under the lease was $28,400 and $6,600, respectively, due in 1999.
The Company purchases inventory from a vendor, which is owned by a
shareholder's relative. For the years ended December 31, 1997 and 1998, the
Company purchased $8,906 and $11,255 of inventory, respectively, from the
vendor. For the six months ended June 30, 1998 and 1999, the Company purchased
$1,306 and $31,260 of inventory, respectively, from the vendor.
(12) Initial Public Offering
In July 1999, the Company's Board of Directors authorized management to file
a registration statement with the Securities and Exchange Commission to permit
the Company to sell shares of its common stock to the public. Also in July
1999, the Company amended its certificate of incorporation to increase from one
share of common stock to approximately 1.08 shares of common stock the number
of shares of common stock into which each share of Series C Preferred will
automatically convert in connection with a public offering which is declared
effective on or before December 31, 1999 and subject to certain conditions
related to the offering. As a result of this amendment and pursuant to
antidilution adjustments, an additional 10,852 warrants to purchase common
stock may be issuable to the Investment Bank for services provided in
connection with the Series C Preferred Financing. Upon completion of the
Company's initial public offering, and assuming the Series C Preferred converts
at the increased ratio, the Series A, Series B-1 and Series C Preferred will
convert into 66,201,914 shares of common stock. Unaudited pro forma
stockholders' equity reflects the assumed conversion of the convertible
preferred stock on this basis as of June 30, 1999.
(13) Subsequent Events
1999 Stock Plan
In July 1999, the Board of Directors adopted the 1999 Stock Plan. The 1999
Stock Plan provides for the grant of stock-based awards to employees, officers
and directors of, and consultants or advisors to, the Company and its
subsidiaries, including incentive stock options and non-qualified stock options
and other equity-based awards. Incentive stock options may be granted only to
the Company's employees. A total of shares of common stock may be issued
upon the exercise of options or other awards granted under the 1999 Stock Plan.
The maximum number of shares that may be granted to any employee under the 1999
Stock Plan shall not exceed shares of common stock during any calendar
year. No options or other equity-based awards have been granted to date under
the 1999 Stock Plan.
1999 Non-Employee Director Stock Option Plan
In July 1999, the Board of Directors adopted the 1999 Non-Employee Director
Stock Option Plan (the Director Plan), and is effective on the date on which
the Company's common stock is registered under the Securities Exchange Act of
1934 (the Exchange Act). A total of 250,000 shares of common stock have been
authorized for issuance under the Director Plan.
F-18
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and June 30, 1999
(Including Data Applicable to Unaudited Periods)
The Director Plan is administered by the Compensation Committee. Under the
Director Plan, each non-employee director who is or becomes a member of the
Board of Directors is automatically granted on the date of which the common
stock becomes registered under the Exchange Act or, if not a director on that
date, the date first elected to the Board of Directors, an initial option to
purchase 20,000 shares of common stock. In addition, provided that the director
continues to serve as a member of the Board of Directors, each non-employee
director will be automatically granted on the third anniversary of his or her
initial option grant date and each three years thereafter an option to purchase
20,000 shares of common stock. Provided that the director continues to serve as
a member of the Board of Directors, one-third of the shares included in each
grant will become exercisable on each of the first, second and third
anniversaries of the date of grant. All options granted under the Director Plan
will have an exercise price equal to the fair market value of the common stock
on the date of grant and a term of ten years from the date of grant, unless
sooner terminated by vote of the Board of Directors. Unexercisable options
terminate when the director ceases to be a director for any reason other than
death or permanent disability. Exercisable options may be exercised at any time
during the option term. No options have been granted to date under the Director
Plan.
1999 Employee Stock Purchase Plan
In July 1999, the Board of Directors adopted the 1999 Employee Stock Purchase
Plan. The 1999 Employee Stock Purchase Plan provides for the issuance of a
maximum of 750,000 shares of common stock.
The 1999 Employee Stock Purchase Plan is administered by the Board of
Directors and the Compensation Committee. All of the Company's employees whose
customary employment is for more than 20 hours per week and for more than three
months in any calendar year and who have completed more than 90 days of
employment with the Company on or before the first day of any six-month payment
period are eligible to participate in the 1999 Employee Stock Purchase Plan.
Outside directors and employees who would own 5% or more of the total combined
voting power of value of the Company's stock immediately after the grant may
not participate in the 1999 Employee Stock Purchase Plan. To participate in the
1999 Employee Stock Purchase Plan, an employee must authorize the Company to
deduct an amount not less than one percent nor more than 10 percent of a
participant's total cash compensation from his or her pay during six-month
payment periods. The first payment period will commence on a date to be
determined by the Board of Directors and end on December 31, 1999. Thereafter,
the payment periods will commence on the first day of January and July and end
on the last day of the following June and December, respectively of each year,
but in no case shall an employee be entitled to purchase more than shares in
any one payment period. The exercise price for the option granted in each
payment period is 85% of the lesser of the average market price of the common
stock on the first or last business day of the payment period, in either event
rounded up to the nearest cent. If an employee is not a participant on the last
day of the payment period, such employee is not entitled to exercise his or her
option, and the amount of his or her accumulated payroll deductions will be
refunded. Options granted under the 1999 Employee Stock Purchase Plan may not
be transferred or assigned. An employee's rights under the 1999 Employee Stock
Purchase Plan terminate upon his or her voluntary withdrawal from the plan at
any time or upon termination of employment. No options have been granted to
date under the 1999 Employee Stock Purchase Plan.
F-19
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Prospective investors may rely only on the information contained in this
prospectus. Neither MotherNature.com, Inc. nor any underwriter has authorized
anyone to provide prospective investors with different or additional
information. This prospectus is not an offer to sell nor is it seeking an
offer to buy these securities in any jurisdiction where the offer or sale is
not permitted. The information contained in this prospectus is correct only as
of the date of this prospectus, regardless of the time of the delivery of this
prospectus or any sale of these securities.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe the restrictions of that jurisdiction
related to this offering and the distribution of this prospectus.
Until , 1999 (25 days after the date of this prospectus), all dealers that
buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This requirement is in
addition to the dealer's obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
----------------------
TABLE OF CONTENTS
----------------------
Page
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 29
Management............................................................... 44
Principal Stockholders................................................... 52
Certain Transactions..................................................... 55
Description of Securities................................................ 58
Shares Eligible for Future Sale.......................................... 62
Underwriting............................................................. 64
Legal Matters............................................................ 67
Experts.................................................................. 67
Where You Can Find More Information...................................... 67
Index to Financial Statements............................................ F-1
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MotherNature.com, Inc.
[LOGO]
Shares
Common Stock
----------------
PROSPECTUS
----------------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Wit Capital Corporation
, 1999
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses, other than underwriting discounts and commissions,
payable by us in connection with the sale of the common stock being registered
under this registration statement are as follows:
SEC registration fee................................................... $15,985
NASD filing fee........................................................ 6,250
Nasdaq National Market listing fee..................................... *
Printing and engraving expenses........................................ *
Legal fees and expenses................................................ *
Accounting fees and expenses........................................... *
Blue Sky fees and expenses (including legal fees)...................... *
Transfer agent and registrar fees and expenses......................... *
Miscellaneous.......................................................... *
-------
Total................................................................ $ *
=======
- --------
*To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law and our charter and by-laws provide for
indemnification of our directors and officers for liabilities and expenses that
they may incur in such capacities. In general directors and officers are
indemnified with respect to actions taken in good faith in a manner reasonably
believed to be in, or not opposed to, our best interests and, with respect to
any criminal action or proceeding, actions that the indemnitee had no
reasonable cause to believe were unlawful. Reference is made to our charter and
by-laws filed as Exhibits 3.1 through 3.5 to this registration statement.
The underwriting agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify our directors, officers and
controlling persons against certain liabilities, including liabilities under
the Securities Act. Reference is made to the form of underwriting agreement
filed as Exhibit 1.1 to this registration statement.
In addition, we have an existing directors and officers liability insurance
policy.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, we
have issued the following securities that were not registered under the
Securities Act:
(a) Issuances of Capital Stock.
In June 1997, we issued and sold 3,090,000 shares of common stock to five
investors for an aggregate purchase price of $5.
In July 1997, we issued and sold 250,000 shares of common stock to two
investors for an aggregate purchase price of $2.
In January 1998, we issued and sold 650,000 shares of common stock to two
investors for an aggregate purchase price of $130.
In May 1998, we issued and sold $400,000 of secured convertible promissory
notes and warrants to purchase an aggregate of 258,064 shares of our common
stock at an exercise price of $0.31 per share to five
II-1
investors. Pursuant to their terms, the notes converted into an aggregate of
1,290,322 shares of series A preferred stock upon the closing of the series A
convertible preferred stock financing discussed below.
In June 1998, we issued and sold an aggregate of 21,451,613 shares of series
A preferred stock at a price per share of $0.31 to seven investors. In July
1998, we issued and sold an additional 1,864,484 shares of Series A preferred
stock to nine investors.
In December 1998, we issued and sold 19,950,125 shares of series B-1
preferred stock at a price per share of $0.5213 to 13 investors. In January
1999, we issued and sold an additional 3,069,250 shares of series B-1 Preferred
Stock to one investor.
In May 1999, we issued and sold 18,409,629 shares of series C preferred stock
at a price per share of $2.2787 to 16 accredited investors. Deutsche Bank Alex.
Brown (formerly BT Alex. Brown Incorporated), served as placement agent for
this offering. As consideration for its services, we paid Deutsche Bank Alex.
Brown $750,000 and issued warrants to Deutsche Bank Alex. Brown to purchase
137,140 shares of our common stock as described in (b) below. Pursuant to
antidilution adjustments, an additional 10,852 shares of common stock will be
issuable under the warrant.
No underwriters were used in the foregoing transactions. All sales of
securities described above were made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act (and/or Regulation
D promulgated thereunder) for transactions by an issuer not involving a public
offering.
(b) Issuances of Notes and Warrants.
In April 1998, we issued warrants to two investors to purchase an aggregate
of 300,000 shares of our common stock at an exercise price of $.01 per share in
consideration for one investor's services as an employee and the other
investor's services as a consultant.
In May 1998, we issued warrants to four investors to purchase an aggregate of
258,064 shares of our common stock at an exercise price of $0.31 per share in
consideration for their lending us $400,000 as described in (a) above. Pursuant
to antidilution adjustments, an additional 10,852 shares of common stock will
be issuable under the warrant.
In December 1998, we issued warrants to our subordinated lender to purchase
an aggregate of 495,261 shares of common stock at an exercise price of $0.5028
per share in consideration of the lender entering into subordinated loan and
lease financing agreements with us.
In December 1998, we granted our subordinated lender the right, on one
occasion only, to convert up to 30% of the original aggregate principal amount
of all advances under our subordinated loan agreement with the lender into
shares of common stock at an exercise price of $0.50 per share.
In May 1999, we issued a warrant to Deutsche Bank Alex. Brown (formerly BT
Alex. Brown Incorporated) to purchase an aggregate of 137,140 shares of our
common stock at an exercise price per share of $2.7344 in consideration of
Deutsche Bank Alex. Brown's services as the placement agent for the shares of
series C preferred stock offered in May 1999 as described in (a) above.
Pursuant to antidilution adjustments, an additional 10,852 shares of common
stock will be issuable under the warrant.
In June 1999, we issued a warrant to one investor purchase up to an aggregate
of 6,000 shares of our common stock at an exercise price per share of $2.50 in
consideration for entering into a real estate lease with us.
No underwriters were used in the foregoing transactions. All sales of
securities described above were made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act (and/or Regulation
D promulgated thereunder) for transactions by an issuer not involving a public
offering.
II-2
(c) Grants and Exercises of Stock Options.
Since June 30, 1996, we have granted stock options to purchase 12,505,294
shares of common stock with exercise prices ranging from $.03 to $2.50 per
share, to employees, directors and consultants pursuant to our 1998 Stock Plan.
Of these options, 1,531,783 have been exercised for an aggregate consideration
of $45,953 as of June 30, 1999. The issuance of common stock upon exercise of
the options was exempt either pursuant to Rule 701, as a transaction pursuant
to a compensatory benefit plan, or pursuant to Section 4(2), as a transaction
by an issuer not involving a public offering.
II-3
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
Exhibit No. Description
----------- -----------
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation, as amended, of the Registrant
(currently in effect).
3.2* Form of Certificate of Amendment to Certificate of Incorporation
of the Registrant (to be filed upon the effectiveness of the
registration statement).
3.3* Form of First Amended and Restated Certificate of Incorporation of
the Registrant (to be filed upon the closing of the offering).
3.4 By-laws of the Registrant (currently in effect).
3.5* Form of Amended and Restated By-laws of the Registrant (to take
effect as of the effective date of the registration statement).
4.1* Specimen Certificate for shares of the Registrant's Common Stock.
4.2 Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibits 3.1 through 3.3).
5.1* Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1+ 1998 Stock Plan.
10.2+* 1999 Stock Plan.
10.3+* 1999 Non-Employee Director Stock Plan.
10.4+* 1999 Employee Stock Purchase Plan.
10.5 Sublease Agreement between Prevision Marketing, Inc. and the
Registrant, dated March 26, 1999, including the Lease between New
England Farms Limited Partnership and Prevision Marketing, Inc.,
dated October 25, 1999, as amended by an Amendment to Lease and
Consent to Sublease, dated March 30, 1999.
10.6 Lease Agreement between Carl E. Breyer, Jr., Raymond P. Pieczarka
and Stephen Spinelli, Jr., Trustees of Park Place Brookdale Realty
Trust, and the Registrant, dated June 18, 1999.
10.7 Lease between Rosemary Nicholson, Trustee of Padala Realty Trust,
and the Registrant, dated June 11, 1998.
10.8 Commercial Lease between Charles W. Ollard and the Registrant,
dated May 1, 1998, including an Addendum to Commercial Lease,
dated May 1, 1998.
10.9 Commercial Lease between Paul A. Bunn and the Registrant, dated
June 30, 1999.
10.10 Second Amended and Restated Registration Rights Agreement dated as
of May 12, 1999 as amended on July 26, 1999.
10.11 Letter agreement between the Company and Ross A. Love dated August
7, 1998.
11.1 Statement re: Computation of Per Share Earnings.
23.1* Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.1).
23.2 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (contained on page II-6).
27.1 Financial Data Schedule.
- --------
*To be filed by amendment.
+Indicates a management contract or any compensatory plan, contract or
arrangement.
(b) Financial Statement Schedules.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
II-4
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective; and (3) that for the purpose of determining
any liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Concord, Massachusetts
on August 13, 1999.
MOTHERNATURE.COM, INC.
By: /s/ Michael I. Barach
-------------------------------------
Michael I. Barach
President, Chief Executive
Officer and Director
POWER OF ATTORNEY
We, the undersigned officers and directors of MotherNature.com (the
"Company"), hereby severally constitute and appoint Michael I. Barach and
Michael L. Bayer, and each of them individually, with full powers of
substitution and resubstitution, our true and lawful attorneys, with full
powers to them and each of them to sign for us, in our names and in the
capacities indicated below, the registration statement on Form S-1 filed with
the Securities and Exchange Commission, and any and all amendments to said
registration statement (including post-effective amendments), and any
registration statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, as amended, in connection with the registration under the Securities
Act of 1933, as amended, of equity securities of the Company, and to file or
cause to be filed the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitute or substitutes, shall do or
cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
below:
Signature Title(s) Date
--------- -------- ----
/s/ Michael I. Barach President, Chief Executive August 13, 1999
______________________________________ Officer and Director
Michael I. Barach
/s/ Michael L. Bayer Chief Financial Officer, August 13, 1999
______________________________________ Treasurer and Secretary
Michael L. Bayer
/s/ Michael A. Greeley Director August 13, 1999
______________________________________
Michael A. Greeley
/s/ Keith M. Kerman Director August 13, 1999
______________________________________
Keith M. Kerman
Signature Title(s) Date
--------- -------- ----
/s/ Brent R. Knudsen Director August 13, 1999
______________________________________
Brent R. Knudsen
/s/ Jason G. Olim Director August 3, 1999
______________________________________
Jason G. Olim
/s/ Marc D. Poirier Director August 13, 1999
______________________________________
Marc D. Poirier
Exhibit Index
Exhibit No. Description
----------- -----------
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation, as amended, of the Registrant
(currently in effect).
3.2* Form of Certificate of Amendment to Certificate of Incorporation
of the Registrant (to be filed upon the effectiveness of the
registration statement).
3.3* Form of First Amended and Restated Certificate of Incorporation of
the Registrant (to be filed upon the closing of the offering).
3.4 By-laws of the Registrant (currently in effect).
3.5* Form of Amended and Restated By-laws of the Registrant (to take
effect as of the effective date of the registration statement).
4.1* Specimen Certificate for shares of the Registrant's Common Stock.
4.2 Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibits 3.1 through 3.3).
5.1* Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1+ 1998 Stock Plan.
10.2+* 1999 Stock Plan.
10.3+* 1999 Non-Employee Director Stock Plan.
10.4+* 1999 Employee Stock Purchase Plan.
10.5 Sublease Agreement between Prevision Marketing, Inc. and the
Registrant, dated March 26, 1999, including the Lease between New
England Farms Limited Partnership and Prevision Marketing, Inc.,
dated October 25, 1999, as amended by an Amendment to Lease and
Consent to Sublease, dated March 30, 1999.
10.6 Lease Agreement between Carl E. Breyer, Jr., Raymond P. Pieczarka
and Stephen Spinelli, Jr., Trustees of Park Place Brookdale Realty
Trust, and the Registrant, dated June 18, 1999.
10.7 Lease between Rosemary Nicholson, Trustee of Padala Realty Trust,
and the Registrant, dated June 11, 1998.
10.8 Commercial Lease between Charles W. Ollard and the Registrant,
dated May 1, 1998, including an Addendum to Commercial Lease,
dated May 1, 1998.
10.9 Commercial Lease between Paul A. Bunn and the Registrant, dated
June 30, 1999.
10.10 Second Amended and Restated Registration Rights Agreement dated as
of May 12, 1999 as amended on July 26, 1999.
10.11 Letter agreement between the Company and Ross A. Love dated August
7, 1998.
11.1 Statement re: Computation of Per Share Earnings.
23.1* Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.1).
23.2 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (contained on page II-6).
27.1 Financial Data Schedule.
- --------
*To be filed by amendment.
+Indicates a management contract or any compensatory plan, contract or
arrangement.